2023 Annual Financial Report

Phoenix Group Holdings PLC
22 March 2024
 


Phoenix Group Holdings plc: 2023 Full Year Results

22 March 2024

Phoenix announces strong full year 2023 results and new progressive dividend policy

Commenting on the results announcement, Phoenix Group CEO, Andy Briggs said:

"Phoenix's vision is to be the UK's leading retirement savings and income business, and we are making great progress in delivering our strategy to achieve this, as our strong 2023 financial results demonstrate.

We have achieved our 2025 growth target two years early with £1.5bn of new business cash delivered by our Standard Life business - a new record. We delivered over £2bn of cash generation and maintained our resilient balance sheet, and our strong performance has enabled the Board to recommend a 2.5% dividend increase.

The next phase of our strategy will see us balance our investment across our strategic priorities to grow, optimise and enhance our business. This will support us in delivering the ambitious new 2026 targets we are announcing today. Our confidence in this strategy is demonstrated by the new progressive and sustainable dividend policy we will operate going forward."

2023 financial results highlights

Cash: growing sustainable cash generation

·      £2,024m total cash generation1 in 2023 (FY22: £1,504m) exceeded our upgraded target of c.£1.8bn for the year, including a c.£400m benefit from the Part VII transfer of Standard Life and Phoenix Life as announced in November.

·      £1,514m of incremental new business long-term cash generation (FY23: £1,233m), achieving our 2025 target of c.£1.5bn two years early.

Includes strong growth from our capital-light Pensions and Savings business to £395m (FY22: £249m) and an increase in our Retirement Solutions business to £1,066m (FY22: £934m), supported by enhanced capital efficiency.

 

Capital: resilient balance sheet

·      £3.9bn2 Solvency II ('SII') Surplus remains resilient (FY22: £4.4bn) and is inclusive of a prudent £70m Consumer Duty provision, following a comprehensive review of our back book products ahead of the July 2024 compliance deadline.

·      176%2,3 SII Shareholder Capital Coverage Ratio ('SCCR') (FY22: 189%3), towards top-end of 140-180% operating range.

·      36% SII leverage ratio (FY22: 34%) and 23% Fitch ratio4 (FY22: 23%4).

 

Earnings: driving improved profitability

·      IFRS adjusted operating profit before tax increased 13% year-on-year to £617m (FY22: £544m5), driven by strong growth in our Pension and Savings business, which is up 27% year-on-year to £190m (FY22: £150m).

·      New business net fund flows of £6.7bn increased 72% year-on-year (FY22: £3.9bn), driven by strong Workplace flows.

·      Significantly reduced IFRS loss after tax of £(88)m (FY22: £(2,657)m5) due to lower market volatility impacts in 2023.

·      Contractual Service Margin of £2.9bn (gross of tax), grew 10% driven by new business and Sun Life of Canada UK.

 

Attractive 2023 dividend growth supported by strong business performance

·      The Board is recommending a 2.5% increase in the Final 2023 dividend to 26.65p per share; Total dividend of 52.65p.

 

The next phase of our strategy delivers growing, sustainable cash generation and supports a new progressive dividend policy

·      In the next phase of our strategy we will build the remaining capabilities required to deliver a full-service customer proposition, through developing compelling Retail market propositions and innovative retirement income solutions.

·      We will also bring together our former Heritage and various Open businesses under a single Group-wide operating model, to offer a seamless journey for customers across their savings life cycle, and realise further cost efficiencies.

·      Operating Cash Generation is our new primary cash metric, which is the sustainable level of annual surplus generation in our life companies, that is then remitted to our Group HoldCo. It comprises our ongoing surplus emergence (£0.8bn in 2023) and the recurring management actions (£0.3bn in  2023) which we expect to deliver every year into the long term.

·      We expect to grow Operating Cash Generation by c.25% from £1.1bn in 2023 to £1.4bn in 2026, as we grow, optimise and enhance our business, after which it is expected to grow at a mid-single digit rate over the long term.

·      The Board's confidence in the delivery of growing Operating Cash Generation supports the move to a new progressive and sustainable ordinary dividend policy6.

 

An evolved financial framework that delivers cash, capital and earnings, with new targets and guidance

·      Cash: we will deliver growing Operating Cash Generation that more than covers our recurring uses and dividend, and generates excess cash.

Operating Cash Generation target of £1.4bn in 2026.

Total Cash Generation 1-year target range of £1.4bn-1.5bn in 2024 and 3-year target of £4.4bn across 2024-26.

·      Capital: we will maintain a resilient balance sheet and allocate surplus capital in accordance with our new capital allocation framework.

Continue to operate within our 140-180% Shareholder Capital Coverage Ratio operating range.

We intend to repay at least £500m7 of debt by the end of 2026, targeting a SII leverage ratio of c.30%8 by the end of 2026.

·      Earnings: drive strong growth in IFRS adjusted operating profit, through business growth and cost efficiencies.

Targeting £900m of IFRS adjusted operating profit in 2026 (FY23: £617m).

£250m of annual cost savings by the end of 2026.

 

New cash emergence profile disclosure demonstrates sustainability of cash generation

·      We are today providing new disclosure on the profile of cash emergence from both our 2023 in-force and new business (contained on page 43 of the appendix of our Full Year 2023 Results presentation that is available on our website).

·      This disclosure supports our cash targets and demonstrates the long-term sustainability of our cash generation.

 

All page references in this document refer to the Phoenix Group Holdings plc Annual Report and Accounts 2023.

 


Enquiries

Investors/analysts:

Claire Hawkins, Director of Corporate Affairs & Investor Relations, Phoenix Group

+44 (0)20 4559 3161

Andrew Downey, Investor Relations Director, Phoenix Group

+44 (0)20 4559 3145

Media:

Douglas Campbell, Teneo

+44 (0)7753 136 628

Shellie Wells, Corporate Communications Director, Phoenix Group

+44 (0)20 4559 3031


Presentation and webcast details

There will be a live virtual presentation for analysts and investors today starting at 09:30 (GMT). You can register for the live webcast at: Phoenix Group 2023 Full Year results

A copy of the presentation is available at:

https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations

A replay of the presentation and transcript will also be available on our website following the event.


Dividend details

The recommended Final 2023 dividend of 26.65 pence per share is expected to be paid on 22 May 2024.

The ordinary shares will be quoted ex-dividend on the London Stock Exchange as of 11 April 2024. The record date for eligibility for payment will be 12 April 2024.


Footnotes

1.   Cash generation is a measure of cash and cash equivalents, remitted by Phoenix Group's operating subsidiaries to the holding companies and is available to cover dividends, debt interest, debt repayments and other items.

2.   31 December 2023 Solvency II capital position is an estimated position and reflects a regulator approved recalculation of transitionals as at 31 December 2023 and recognition of the foreseeable Final 2023 shareholder dividend of £267m.

3.   The Shareholder Capital Coverage Ratio excludes Solvency II Own Funds and Solvency Capital Requirements of unsupported With-Profit funds and unsupported pension schemes.

4.   Fitch leverage ratio is estimated by management based on Fitch's published methodology. Ratio allows for currency hedges over foreign currency denominated debt.

5.   2022 restated comparative to reflect adoption of IFRS 17 and incorporates changes to the Group's methodology for determining adjusted operating profit since HY 2023.

6.   The Board will continue to prioritise the sustainability of our dividend over the very long term. Future dividends and annual increases will continue to be subject to the discretion of the Board, following assessment of longer-term affordability.

7.   £500m of debt repayment includes the £250m Tier 2 Bond that is callable in June 2024, subject to regulatory approval.

8.   Assuming economic conditions in line with 31 December 2023.


Legal Disclaimers

This announcement in relation to Phoenix Group Holdings plc and its subsidiaries (the 'Group') contains, and the Group may make other statements (verbal or otherwise) containing, forward-looking statements and other financial and/or statistical data about the Group's current plans, goals, ambitions, outlook, guidance and expectations relating to future financial condition, performance, results, strategy and/or objectives.

Statements containing the words: 'believes', 'intends', 'will', 'may', 'should', 'expects', 'plans', 'aims', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward looking.  Such forward-looking statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that the Group has estimated.

Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include, but are not limited to: domestic and global economic, political, social, environmental and business conditions; asset prices; market-related risks such as fluctuations in investment yields, interest rates and exchange rates, the potential for a sustained low-interest rate or high interest rate environment, and the performance of financial or credit markets generally; the policies and actions of governmental and/or regulatory authorities including, for example, climate change and the effect of the UK's version of the 'Solvency II' regulations on the Group's capital maintenance requirements; developments in the UK's relationship with the European Union; the direct and indirect consequences for European and global macroeconomic conditions of the conflicts in Ukraine and the Middle East, and related or other geopolitical conflicts; political uncertainty and instability; the impact of changing inflation rates (including high inflation) and/or deflation; information technology or data security breaches (including the Group being subject to cyber-attacks); the development of standards and interpretations including evolving practices in ESG and climate reporting with regard to the interpretation and application of accounting; the limitation of climate scenario analysis and the models that analyse them; lack of transparency and comparability of climate-related forward-looking methodologies; climate change and a transition to a low-carbon economy (including the risk that the Group may not achieve its targets); the Group's ability along with governments and other stakeholders to measure, manage and mitigate the impacts of climate change effectively; market competition; changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); the timing, impact and other uncertainties of any acquisitions, disposals or other strategic transactions; risks associated with arrangements with third parties; inability of reinsurers to meet obligations or unavailability of reinsurance coverage; and the impact of changes in capital, and implementing changes in IFRS 17 or any other regulatory, solvency and/or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.

As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals, ambitions, outlook, guidance and expectations set out in the forward-looking statements and other financial and/or statistical data within this announcement. The Group undertakes no obligation to update any of the forward-looking statements or data contained within this announcement or any other forward-looking statements or data it may make or publish.  Nothing in this announcement constitutes, nor should it be construed as, a profit forecast or estimate.

 

 

 

Chair's statement

 

Delivering on our purpose

We want to help people journey to and through retirement while investing in a better future for us all. Our approach focuses on two key areas: People and Planet. We are looking to address the UK pensions savings gap and manage the risk and opportunities of climate change.

 

At Phoenix our purpose is our North Star and it drives all that we do. I am delighted with the progress we have made this year to bring about better outcomes for all our stakeholders.

Nicholas Lyons, Chair of the Group Board

 

Sabbatical reflections

1 December 2023 marked my return as Chair of Phoenix Group, following a 14-month sabbatical where I fulfilled the role of Lord Mayor of the City of London. I am delighted to be back and look forward to supporting the continued evolution of our business.

 

As Lord Mayor it was my great privilege and responsibility to represent and promote the UK financial services industry. In doing so, my sabbatical confirmed to me that this industry is an essential element of the UK economy, with a critical role to play in supporting both economic growth and the trajectory to net zero by 2050 through sustainable investment. The clear feedback from my international travels is that the UK financial services industry is perceived as market-leading and there is great optimism about its future.

 

I would like to thank Alastair Barbour who assumed the role of Chair in my absence. He has made an enormous contribution to Phoenix over his ten-year tenure as a Director, and I wish him well for the future now that he has stepped down from the Board.

 

Delivering on our purpose

The pensions savings gap in the UK is a growing societal problem. As the UK's largest long-term savings and retirement business, we are striving to raise awareness of this problem and advocate for the changes needed to deliver the solutions and help people secure a life of possibilities.

 

We know that people can only save for their retirement if they have access to good work over their longer lives. That is why we are playing a role in promoting good work through Phoenix Insights, working in collaboration with others to influence government policy.

 

We are committed to innovating to develop the retirement income solutions of the future and we are advocating for the removal of policy barriers to enable us to support customers as they save for, journey to, and secure income in, retirement. More specifically we have recommended a framework to support an increase in auto-enrolment contributions from 8% to 12%, and we believe that guidance and advice should be available for everyone, not just those who can afford to pay for it.

 

We can drive good outcomes for our customers and manage the risks of climate change by delivering on our Net Zero Transition Plan commitments, outlined in our plan published in May, and by helping to unlock the barriers to allow capital to flow at scale into productive and sustainable investments.

 

I was delighted that we were a leading signatory and vocal proponent of the Mansion House Compact when it was unveiled in July. This seeks to address some of the issues around investing in unlisted equity, and the growth of UK companies of the future. I have every confidence the Compact will accomplish the dual aim of securing a brighter future for retirees and helping to channel billions of pounds into the UK economy.

 

Strong cash generation provides opportunity to invest and realise our vision

The team has delivered strong cash generation in 2023 with an acceleration in the organic growth story clearly evident, whilst at the same time maintaining a resilient balance sheet.

 

We are on a journey to deliver our vision of becoming the UK's leading retirement savings and income business. The clear strategic success in building the organic growth business over the last three years means we have reached a key milestone on our journey, as we evolve the business. The focus is now on investing to grow, optimise and enhance the business even further.

 

Strategic outcomes support a new dividend policy

I am delighted to announce that the Board is recommending a 2.5% increase in the Group's 2023 Final dividend to 26.65 pence per share. This means the Group's Total dividend for 2023 will be 52.65 pence per share.

 

The Board is confident in the Group's ability to deliver the next phase of our strategic journey, as we transition to our vision of becoming the UK's leading retirement savings and income business. This has supported our decision to move to a progressive and sustainable ordinary dividend policy, which is underpinned by the sustainable growth in Operating Cash Generation we now expect to deliver.

 

Thank you

Finally, I would like to take this opportunity to thank the Board, our colleagues, our partners and our wider stakeholders for their hard work, dedication and support in delivering another year of strong progress.

 

 

Nicholas Lyons

Chair of the Group Board

 

 

 

 

Group Chief Executive Officer's report

 

Successfully delivering our strategy

 

2023 has seen Phoenix Group deliver significant strategic progress and strong results, further supporting our track record of dividend growth.

 

We are on a journey from being a closed-book life consolidator to a purpose-led retirement savings and income business

Strong 2023 results delivered through strategic execution

We are balancing our investment to grow, optimise and enhance our business

Our strategy delivers sustainable, growing Operating Cash Generation that more than covers our recurring uses and a growing dividend

Phoenix will now operate a progressive and sustainable ordinary dividend policy

 

£2.0bn

2023 Total cash generation

(2022: £1.5bn) REM APM

 

+2.5%

 2023 Final dividend increase

 

 

I am delighted that 2023 was another year of strong new business growth for Phoenix Group. Having now built the component parts of a sustainably growing business, the next stage on our journey will see us grow, optimise and enhance our business so we can meet more of our customers' retirement needs and deliver more value for our stakeholders.

Andy Briggs, Group Chief Executive Officer

 

Delivering strong results

2023 has been another year of clear strategic delivery for Phoenix.

 

We're a highly cash generative business, as demonstrated by the delivery of £2.0 billion of total cash generation in 2023 (2022: £1.5 billion), exceeding our upgraded target of c.£1.8 billion target for the year. This was supported by the completion of one of the largest ever UK insurance Part VII transfers.

 

Executing against our strategic priorities enabled us to deliver another record year of new business long-term cash generation ('NB LTCG') of £1.5 billion (2022: £1.2 billion). This was supported by a c.70% increase in new business net fund flows in 2023 to £6.7 billion (2022: £3.9 billion). Performance in our Pensions and Savings business included the transfer of the Siemens workplace scheme, one of the largest workplace scheme transfers to have been tendered in the UK market in recent years. This clearly demonstrates the success we have had in re-establishing the Standard Life brand as a major workplace player. Growth in our Retirement Solutions business was also strong, driven by our Bulk Purchase Annuities ('BPA') business, which saw the Group write £6.2 billion of premiums during the year (FY22: £4.8 billion) at a reduced capital strain.

 

From a capital perspective, we saw a reduction in our Solvency II surplus to £3.9 billion (2022: £4.4 billion) and our Shareholder Capital Coverage Ratio ('SCCR') to 176% (2022: 189%) after allocating capital into growth opportunities. However, we continue to operate towards the upper-end of our 140-180% SCCR operating range.

 

In terms of our earnings, our IFRS adjusted operating profit increased by 13% to £617 million (2022: £544 million) supported by growth in our Pensions and Savings business. However, we reported an IFRS loss after tax of £(88) million, reflecting our investment into growth opportunities, as well as integration and transformation expenses in the period. However, this was significantly lower than the 2022 loss of £(2,657) million, benefiting from less accounting volatility from market movements.

 

As a result of this strong strategic and financial performance, the Board has recommended a 2.5% increase in the Final dividend of 26.65 pence per share, bringing the Total 2023 dividend to 52.65 pence per share, extending our strong track record of dividend growth.

 

A strategy supported by existing large and growing markets

Phoenix Group is the UK's largest long-term savings and retirement business, managing c.£283 billion of assets for c.12 million customers. Our purpose of 'helping people secure a life of possibilities' is embedded in everything that we do and informs our single strategic focus, which is to help customers journey to and through retirement.

 

We have a diversified and balanced business mix, across the long-term savings and retirement market, which can be largely categorised as 'Pensions and Savings' and 'Retirement Solutions'. Around two-thirds of our business is Pensions and Savings, which principally consists of capital-light fee-based products.

 

The UK long-term savings and retirement market is already large, with c.£3 trillion of total stock, but it is also growing fast, with annual flows of c.£150-200 billion. The breadth of our product portfolio means we are able to take advantage of a number of growing market opportunities. See pages 18 to 19 for 'Our growth drivers'.

 

Embarking on the next stage of our journey

Back in 2020, we had a single core capability, which was executing M&A and integrating those businesses. However, over the past three years we have built a number of sustainably growing organic businesses too.

 

This has seen us acquire and invest into the trusted Standard Life brand, and re-establish it amongst customers, corporates and advisers.

 

We have used that brand to help turbo-charge our growth as we built a competitive and capital efficient annuities business, followed by our now large and rapidly growing capital-light Workplace business.

 

In addition, we have built a highly-skilled in-house asset management capability, enabling us to efficiently manage our third-party asset managers, and to create long-term value through optimising our c.£38 billion shareholder credit portfolio.

 

We have an ongoing programme of initiatives to review our products and services and over the past seven years, we have invested significantly in focusing on good customer treatments and outcomes across our businesses. During that time, we have set aside over £200m on reducing charges and we are making planned investment to migrate customers to more modern technology. We are actively working to ensure we are well positioned to comply fully with the upcoming Consumer Duty requirements which come into effect on 31 July 2024, for which we have set aside £70 million of Solvency II capital.

 

Our successful execution has enabled us to prove "the wedge" hypothesis, with the new business cash from our Open businesses more than offsetting the Heritage run-off. That means we are today a sustainably growing business, and no longer reliant on M&A.

 

The next phase of our strategy is therefore about building on the strong foundations we have developed, and completing our full-service customer offering.

 

We will do this by building an innovative range of retirement income solutions and a compelling set of retail propositions, supported by a digital customer interface with personalised data, guidance and advice.

 

We are also now at the stage where we can further simplify our organisational structure, through integrating our Heritage and Open businesses onto a single Group-wide operating model. This will enable us to grow faster, by offering all of our customers, whether in an Open or Heritage product, a seamless journey across their savings life cycle. It will also further enhance our existing cost efficiency.

 

The successful execution of our strategy will enable us to win market share and grow our business sustainably over time as we journey towards our vision of becoming the UK's leading retirement savings and income business.

 

Balancing investment across our strategic priorities

To support us on our journey we have a clear set of strategic priorities to 1) Grow 2) Optimise and 3) Enhance, which are informed by - and in support - of our ESG themes of Planet and People and are underpinned by robust investment programmes within our new capital allocation framework. See pages 24 to 29 for more detail on our strategic priorities.

 

Firstly, we will Grow through building an innovative range of retirement income solutions, and a compelling set of Retail propositions, supported by a digital customer interface, with personalised data, guidance and advice. We will also further strengthen our Workplace proposition and optimise our annuities business. This will require c.£100 million of investment into our growth propositions, alongside c.£200 million of capital per annum into annuities, the outcome of which is to support mid-single digit growth in Operating Cash Generation over the long term.

 

Our second priority is to Optimise. As part of this we plan to continue our approach of repaying M&A-related debt with surplus cash. We expect to repay at least £500 million of debt by the end of 2026, on top of the c.£800 million we have repaid since 2020. This will support us in getting to a c.30% Solvency II leverage ratio by the end of 2026, which we believe is an appropriate steady-state level for our business, absent M&A.

 

We will also invest c.£100 million to enhance our asset and liability optimisation capabilities. This, alongside strong business growth, will support us in delivering increased recurring management actions of c.£400 million by 2026.

 

Our Enhance priority is designed to support us in transforming our operating model and culture, to create a leading, cost efficient and modern organisation.

 

We continue to invest to complete our remaining customer migrations onto TCS Diligenta. In addition, we intend to invest to improve the support we give our customers throughout their lives and to drive scale cost efficiencies by integrating our business onto a single Group-wide operating model. Together, these migration, transformation and cost efficiency progammes will require c.£500 million of investment.

 

Our focus on driving cost efficiency will enable us to deliver c.£250 million of annual cost savings by the end of 2026, which will enhance all of our key reporting metrics.

 

We also continue to strive to make Phoenix Group 'the best place any of us have ever worked'; through providing a great colleague experience. We passionately believe that by being diverse and inclusive we'll be a better organisation, we'll make better decisions, and we'll do a better job of representing our customers and communities.

 

Our new simplified, diverse and inclusive organisational structure will better empower our colleagues to make the right decisions for our customers.

 

Demonstrating the long-term sustainability of our business

Our strategy will support the delivery of sustainable, growing cash generation, a resilient capital position and improved earnings.

 

As part of our evolved financial framework we are introducing Operating Cash Generation ('OCG') as a new metric, to demonstrate the long-term sustainability of our business.

 

OCG is the sustainable level of surplus generation in our Life Companies, each and every year, that is also then remitted as cash to our Group Holding Company. See page 33 in our Business Review for more detail.

 

Executing against our strategic priorities will help us to grow OCG by c.25% over the next three years, from £1.1bn in 2023 to £1.4bn in 2026. After this time, we expect it to grow at a sustainable, mid-single digit growth rate over the long term.

 

Importantly, this OCG more than covers our recurring uses, and a growing dividend. Which generates excess cash that can support additional investment back into the business and/or additional shareholder returns.

 

M&A can add further scale to our business

Our existing scale and the success of our organic growth strategy mean that we are no longer reliant on M&A to grow our business and dividend, in the way we were when I joined.

 

We continue to believe that M&A can generate significant shareholder value, as demonstrated by our strong track record, and we see it as a potential lever to add further scale to our business.

 

However, we now have a range of organic growth opportunities available, in which to deploy our excess cash at very attractive returns, and so the bar for acquisitions is now higher than it has ever been.

Outlook

The economic backdrop in the UK means our societal purpose of helping people secure a life of possibilities has never been more important.

 

As we continue to strive to meet the needs of our customers, colleagues and other key stakeholders, this will support us in achieving our vision of becoming the UK's leading retirement savings and income business.

 

We are investing to grow, optimise and enhance our business to deliver this vision, which will enable us to win market share and grow our business sustainably over time.

 

As a result, the Board believes it is now appropriate for us to move to a progressive and sustainable ordinary dividend policy, which is underpinned by the sustainable, growing OCG we expect to deliver over the long term.

 

We see this as a pivotal step in the evolution of Phoenix Group's investment case, and it is a reflection of the Board's confidence in our future strategy.

 

Thank you

The fantastic progress Phoenix Group has made this year could not have been achieved without our exceptional people. I would therefore like to thank my colleagues throughout the Group for their continued contribution and dedication.

 

I look forward to our team delivering another year of significant progress in 2024.

 

 

Andy Briggs

Group Chief Executive Officer

 

 

 

Business review

 

Delivering sustainable cash generation

 

A strong performance in 2023

Key financial performance metrics:

2023

2022

YOY change

Cash

Total cash generation

£2,024m

£1,504m

+35%

New business

Incremental new business long-term cash generation

£1,514m

£1,233m

+23%

Net fund flows

£6.7bn

£3.9bn

+72%

Dividends

Total dividend per share

52.65p

50.8p

+3.6%

Final dividend per share

26.65p

26.0p

+2.5%

IFRS

Adjusted operating profit before tax1,2

£617m

 £544m

+13%

Loss after tax1,2

£(88)m

£(2,657)m

N/A

Solvency II capital

PGH Solvency II surplus

£3.9bn

£4.4bn

-11%

PGH Shareholder Capital Coverage Ratio

176%

189%

-13%pts

Assets

Assets under administration

£283bn

£259bn

+9%

Leverage

Solvency II leverage ratio

36%

34%

+2%pts

 

1    2022 restated comparative to reflect adoption of IFRS 17

2    Incorporates changes to the Group's methodology for determining adjusted operating profit since Half Year 2023 (see note B.1 to the consolidated financial statements for further details).

 

 

In 2023 we have once again delivered a year of strong performance, as we execute on our strategy and fulfil our purpose.

 

We have delivered another year of resilient cash generation, with £2.0 billion of total cash generated in 2023, exceeding our upgraded target of c.£1.8 billion. With £5.2 billion delivered across 2021 to 2023, we have also therefore over-delivered our three-year cash generation target of £4.4 billion, by c.£0.8 billion.

 

We saw a strong performance in our growth businesses, which increased our incremental new business long-term cash generation ('NB LTCG') by 23% year-on-year to £1,514 million, and therefore have achieved our 2025 target two years early. This was supported by new business net fund flows that grew 72% to £6.7 billion (2022: £3.9 billion).

 

Our Shareholder Capital Coverage Ratio ('SCCR') of 176% remains towards the upper-end of our operating range of 140-180%, but reduced given our investment into growth, as well as our integration and transformation expenses. Similarly, our Solvency II ('SII') surplus reduced to £3.9 billion, but remains resilient.

Our strong overall performance this year has therefore enabled the Board to recommend a dividend increase of 2.5% for the year.

 

In terms of our IFRS earnings, the Group's adjusted operating profit grew 13% to £617 million, supported by 27% growth in our Pensions and Savings business and an 8% increase in our Retirement Solutions business. While we reported an IFRS loss after tax of £88 million, this was a £2,569 million improvement on 2022. The loss in 2023 was primarily driven by £(781) million of non-operating items, as outlined on page 36.

 

The segmental information given reflects the Group's new operating segments, further information is provided in note B.1 on page 180.

 

Clear strategic progress

We have made significant strategic progress in delivering sustainable organic growth.

In Pensions and Savings, our Workplace business continues to see an attractive retention rate with existing clients but is also now winning new larger schemes. Our Retail business remains in net outflow, but we have a clear strategy to address this over the coming years, by investing to deliver compelling customer propositions.

 

In Retirement Solutions, we continue to adopt a disciplined approach to Bulk Purchase Annuities ('BPA') and have been successful in reducing our capital strain. In September, we also launched a new individual annuity product, our first that is available in the open market.

 

From an M&A perspective, we successfully completed the acquisition of Sun Life of Canada UK ('SLOC') in April with the integration progressing well.

 

In summary, 2023 has been another year of clear strategic progress, that has supported the delivery of a strong set of results.

 

We continue to deliver sustainable and resilient cash generation, which underpins our new progressive and sustainable ordinary dividend policy. Our Solvency capital position also remains highly resilient, and can support the investment to grow, optimise and enhance our business going forward.

 

An evolved financial framework for the next phase of our journey

We are introducing our evolved financial framework that focuses on the three financial outcomes we deliver for our shareholders: cash, capital and earnings.

 

Phoenix has always managed its business for cash and capital, but our evolved key metrics provide clearer line of sight to the underlying business performance and more comparability with peers. We are also elevating the importance of IFRS earnings in our framework, following the transition to IFRS 17.

 

The key metrics we use can be seen here

 

 

The progress we have made in executing our strategic priorities has enabled us to deliver a strong set of results in 2023, and supported the Board's decision to recommend a 2.5% increase in the Final 2023 dividend.

Rakesh Thakrar, Group Chief Financial Officer

 

Our key performance indicators

With our financial framework designed to deliver cash, capital and earnings, we recognise the need to use a broad range of metrics to measure and report the performance of the Group, some of which are not defined or specified in accordance with Generally Accepted Accounting Principles ('GAAP') or the statutory reporting framework. The IFRS results are discussed on pages 36 to 37 and the IFRS financial statements are set out from page 164 onwards.

 

Alternative performance measures

In prioritising the generation of sustainable cash flows from our operating companies, performance metrics are monitored where they support this strategic purpose, which includes ensuring that the Solvency II capital strength of the Group is maintained. We use a range of Alternative Performance Measures ('APMs') to evaluate our business, including the below. Please see the APM

section on page 312 for further details.

 

Total cash generation

Cash generation represents the total cash remitted from the operating entities to the Group, supported by the Operating Cash Generation (see below) and the release of free surplus above capital requirements in the Life Companies, which is generated through margins earned on life and pension products and the release of capital requirements, and Group tax relief. This cash generation is used by the Group to fund expenses, interest costs and shareholder dividends, with any surplus then available to reinvest into organic and inorganic growth opportunities.

 

Operating Cash Generation

Operating Cash Generation ('OCG') is a new reporting metric. It represents the sustainable level of cash generation in our life companies each and every year, that is remitted from our underlying business operations. It comprises the emergence of cash as in-force business runs off over time and capital unwinds, plus day one surplus from writing new business (net of day one strain for fee-based business), group tax relief and recurring management actions. In addition, it includes a small cash contribution from the release of the Capital Management Policy that we hold in our Life Companies. The measure provides the sources of recurring organic cash generated which can be used to support sustainable cash remittances from the Life Companies, which in turn supports the Group's dividend, group costs and debt interest as well as funding investment to generate sustainable growth.

 

Incremental new business long-term cash generation

Incremental new business long-term cash generation is a key metric for measuring growth. It represents the operating companies' cash generation that is expected to arise in future years as a result of new business transacted in the period.

 

New business net fund flows

Represents the aggregate net position of assets under administration inflows less outflows for new business.

 

Adjusted operating profit

The Group uses adjusted operating profit as a measure of IFRS performance based on long-term assumptions. Adjusted operating profit is less affected by the short-term market volatility driven by Solvency II hedging (as illustrated on page 36) and non-recurring items than IFRS profit. A more detailed definition of adjusted operating profit is set out on page 312.

 

Solvency II

Solvency II is a key metric by which the Group makes business decisions and measures capital resilience. It is a regulatory measure that prescribes the measurement of value on a Solvency II basis and the calculation of the solvency capital requirement ('SCR'). The excess value above the SCR is reported as both a financial amount, 'Solvency II surplus', and as a ratio 'Solvency II Shareholder Capital Coverage Ratio ('SCCR')'.

 

Solvency II leverage

The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. Solvency II leverage is calculated as the Solvency II value of debt divided by the value of Solvency II Regulatory Own Funds. Values for debt are adjusted to allow for the impact of currency hedges in place over foreign currency denominated debt.

 

 

 

Cash

£2,024m

Total cash generation REM APM

 

£1,514m

 Incremental new business long-term cash generation REM APM

 

 

Group cash flow analysis

£m

2023

2022

Cash and cash equivalents at 1 January

503

963

Total cash generation1

2,024

1,504

Uses of cash:



Operating expenses

(97)

(78)

Pension scheme contributions

(16)

(16)

Debt interest

(229)

(244)

Non-operating cash outflows

(111)

(395)

Debt repayments

(350)

(450)

Debt issuance

346

-

Shareholder dividend

(520)

(496)

Total uses of cash

(977)

(1,679)

Support of BPA activity

(288)

(285)

Cost of Sun Life of Canada UK acquisition

(250)

-

Closing cash and cash equivalents at 31 December

1,012

503

 

 

1    Total cash receipts include £219 million received by the holding companies in respect of tax losses surrendered (2022: £55 million).

 

 

Total cash generation

Cash generation represents cash remitted by the Group's operating companies to the holding companies. Please see the APM section on page 312 for further details of this measure.

 

Cash generation is principally used to fund the Group's operating costs, debt interest and repayments, investment into growth and shareholder dividends. Excess cash is available for investment into the business and/or additional shareholder returns.

 

The cash flow analysis that follows reflects the cash paid by the operating companies to the Group's holding companies, as well as the uses of those cash receipts.

 

Cash receipts

Total cash generated by the operating companies during 2023 was £2,024 million (2022: £1,504 million). This exceeded the Group's upgraded target of c.£1.8 billion for the year, due to additional management actions being delivered.

 

Uses of cash

Operating expenses of £97 million (2022: £78 million) represent corporate office costs, net of income earned on holding company cash and investment balances. The increase compared to 2022 reflects the investment we have made in our Group capabilities to support our growth strategy,

 

Debt interest of £229 million (2022: £244 million) reflects interest paid in the period on the Group's debt instruments. The decrease year-on-year is due to the repayment of debt in July 2022.

 

Non-operating cash outflows were £111 million (2022: £395 million). This primarily comprises centrally funded projects and investments totalling £307 million. Of this, £129 million relates to Group project expenses for the transition activity in relation to legacy platform migrations, £18 million for other ongoing integration programmes including ReAssure and SLOC, £56 million of investment related to our growth propositions, and £12 million for our Finance Transformation. These costs were partially offset by a £196 million inflow in respect of net collateral cash and hedge close-outs.

 

Debt repayments and issuance in 2023 reflect the debt re-terming exercise we undertook in the fourth quarter.

 

The shareholder dividend of £520 million represents the payment of £260 million in May for the 2022 Final dividend and the payment of the 2023 Interim dividend of £260 million in September.

 

Funding of £288 million (2022: £285 million) has been provided to the Life Companies to support another strong year in BPA with £6.2 billion of premiums written (2022: £4.8 billion). The Group's success in further optimising its capital efficiency is reflected in the reduction of the Group's capital strain on BPA to 2.7% (2022: 3.2%) on a pre-Capital Management Policy ('CMP') basis, including the benefit of the Solvency II reform risk margin reduction. This enabled the Group to write increased NB LTCG but with a similar level of capital invested.

 

 

Incremental new business long-term cash generation

NB LTCG reflects the impact on the Group's future cash generation arising as a result of new business transacted in the year. It is stated on an undiscounted basis.

 

In 2023 we delivered another record year of organic new business growth including NB LTCG of £1,514 million (2022: £1,233 million), enabling us to achieve our 2025 target two years early.

 

Strong growth in our capital-light fee-based business, Pensions and Savings, led to a contribution of £395 million (2022: £249 million). Our disciplined approach in a buoyant BPA market drove an increase in NB LTCG in our Retirement Solutions business to £1,066 million (2022: £934 million). Europe and Other contributed £53 million (2022: £50 million).

 

 

Strong incremental new business long-term cash generation

 

 

Introducing Operating Cash Generation

As part of our evolved financial framework we are introducing Operating Cash Generation ('OCG') as a new alternative performance metric to demonstrate the long-term sustainability of our cash generation.

 

OCG is the combination of the operating surplus emerging and recurring management actions. It represents the sustainable surplus generation remitted from our Life Companies to the Group Holding Company. OCG can be easily reconciled to operating surplus generation ('OSG'), with the bridge being the small release of the Capital Management Policy ('CMP') held in our Life Companies.

 

OCG totalled £1.1 billion in 2023, comprising £0.8 billion of surplus emergence and £0.3 billion of recurring management actions.

 

Outlook

We will grow OCG sustainably over the long term through investing our surplus cash across our three strategic priorities of Grow, Optimise and Enhance.

 

We will Grow by investing c.£100 million into our growth propositions and by continuing to grow our annuities business with c.£200 million of capital invested annually. This will support strong growth across our Pensions and Savings and Retirement Solutions businesses.

 

As we Optimise, we will deliver recurring management actions of c.£400 million per annum by 2026, supported by c.£100 million investment in our asset and liability optimisation capabilities and as our business grows.

 

As we Enhance our business, we will continue to migrate customers and drive through cost efficiencies that will deliver c.£250 million of annual cost savings by the end of 2026.

 

Together these will increase OCG by c.25% from £1.1 billion in 2023 to £1.4 billion in 2026. After which we expect it to grow at a sustainable mid-single digit growth rate over the long term.

 

Future sources and uses of total cash generation

While OCG is our new primary metric, total cash generation remains very important, as we invest across our strategic priorities.

 

We have set a new total cash generation target of £4.4 billion across 2024-2026, that will enable us to cover our recurring uses, pay our growing dividend and invest in our business.

 

We expect to generate c.£3.7 billion of OCG over this period, which will more than cover our recurring uses and our planned investment of capital into annuities each year.

 

In addition we expect to generate a further c.£0.7 billion of non-operating cash generation across 2024-2026 comprising other management actions and the release of historic excess capital that has built up in our Life Companies. That provides us with a significant amount of surplus cash that we can invest across our strategic priorities.

 

Our HoldCo cash position is a healthy £1 billion today, which we expect to remain broadly consistent over 2024 to 2026.

 

 

We are introducing Operating Cash Generation as a new metric to demonstrate the long-term sustainability of our business model

 

Operating Cash Generation is expected to more than cover our recurring uses and generates surplus to invest into our business

 

 

Capital

£3.9bn

Group Solvency II surplus (estimated)

 

176%

Group Solvency II shareholder capital Coverage Ratio (estimated) APM

 

 

Capital management

A Solvency II capital assessment involves a valuation in line with Solvency II principles of the Group's Own Funds and a risk-based assessment of the Group's Solvency Capital Requirement ('SCR').

 

The Group's Own Funds differ materially from the Group's IFRS equity for a number of reasons, including the recognition of future shareholder transfers from the With-Profits funds and future management charges on investment contracts, the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably in respect of insurance contract liabilities, taxation and intangible assets.

 

Group Solvency II capital position

Our Solvency II capital position remains strong and resilient, with a surplus of £3.9 billion (2022: £4.4 billion), after the accrual for the deduction of our 2023 Final dividend of £267 million. Our SCCR reduced marginally to 176% (2022: 189%) but remains towards the upper-end of our 140-180% operating range, providing the capacity to continue investing to grow, optimise and enhance our business.

 

Change in Group Solvency II surplus and SCCR

Operating surplus generation increased the SII surplus by £1.1 billion, contributing to an increase in the SCCR of 27%pts. This was comprised of our ongoing surplus emergence which increased the SII surplus by £0.8 billion during the year and recurring management actions of £0.3 billion.

 

Other management actions increased the SII surplus further by £0.4 billion and added 16%pts to the SCCR.

 

Operating costs, debt interest and dividend totalled £0.9 billion, reducing the SCCR by 19%pts.

 

We have also chosen to invest £0.4 billion of surplus capital into growth. This includes £0.3 billion of capital investment to fund £6.2 billion of BPA premiums written in the year, reducing the SCCR by 10%pts, and £0.1bn of investment into our organic growth propositions, reducing the SCCR by a further 3%pts.

 

Our comprehensive hedging strategy is designed to protect our capital position. In 2023 this led to a small adverse impact from economic variances of £(0.3) billion on our Solvency II surplus. This included a £(0.1) billion adverse impact from unhedged gilt-swap spread movements, as well as adverse currency movements and some other smaller adverse impacts.

 

We are on track for the effective date for Consumer Duty on back-book products in July. Our ongoing focus on ensuring good outcomes for Heritage customers means we have identified only a small number of products that we believe need addressing in advance of the compliance date. We have set aside a prudent c.£70 million of Solvency II capital to reflect the impact of the possibility of introducing further charging caps on certain products, reducing the SCCR by 2%pts.

 

Other movements include the benefit of the Solvency II risk margin reform and favourable longevity assumption changes. These were offset by the strengthening of expense provisions associated with our transformation projects, in addition to a net adverse impact arising on the completion of the SLOC acquisition. Overall, these movements decreased Solvency II surplus by £0.3 billion and the SCCR by 13%.

 

 

£3.9 billion Group Regulatory Solvency II surplus

 

£3.9 billion Group Shareholder Solvency II surplus

 

2023 change in Group Solvency II surplus

 

 

Estimated impact on PGH Solvency II1

Surplus £bn

SCCR %

Solvency II base

3.9

176

Equities: 20% fall in markets

0.1

5

Long-term rates: 100bps rise in interest rates2

0.1

6

Long-term rates: 100bps fall in interest rates2

(0.1)

(5)

Long-term inflation: 50bps rise in inflation3

(0.1)

(1)

Property: 12% fall in values4

(0.2)

(5)

Credit spreads: 135bps widening with no allowance for downgrades5

(0.2)

(4)

Credit downgrade: immediate full letter downgrade on 20% of portfolio6

(0.3)

(9)

Lapse: 10% increase/decrease in rates7

(0.1)

(1)

Longevity: 6 months increase8

(0.4)

(8)

1    Illustrative impacts assume changing one assumption on 1 January 2024, while keeping others unchanged, and that there is no market recovery. They should not be used to predict the impact of future events as this will not fully capture the impact of economic or business changes. Given recent volatile markets, we caution against extrapolating results as exposures are not all linear.

2    Assumes the impact of a dynamic recalculation of transitionals and an element of dynamic hedging which is performed on a continuous basis to minimise exposure to the interaction of rates with other correlated risks including longevity.

3    Rise in Inflation: 15yr inflation +50bps.

4    Property stress represents an overall average fall in property values of 12%.

5    Credit stress varies by rating and term and is equivalent to an average 135bps spread widening. It assumes the impact of a dynamic recalculation of transitionals and makes no allowance for the cost of defaults/downgrades.

6    Impact of an immediate full letter downgrade across 20% of the shareholder exposure to the bond portfolio (e.g. from AAA to AA, AA to A, etc). This sensitivity assumes management actions are taken to rebalance the annuity portfolio back to the original average credit rating and makes no allowance for the spread widening which would be associated with a downgrade.

7    Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.

8    Only applied to the annuity portfolio.

 

Sensitivity and scenario analysis

As part of the Group's internal risk management processes, the Own Funds and regulatory SCR are regularly tested against a number of financial scenarios. The table provides illustrative impacts of changing one assumption while keeping others unchanged and reflects the business mix at the balance sheet date. Extreme market movements outside of these sensitivities may not be linear. While there is no value captured in the Group stress scenarios for recovery management actions, the Group does proactively manage its risk exposure. Therefore in the event of a stress, we would expect to recover some of the loss reflected in the stress impacts shown.

 

Unrewarded market risk sensitivities

We have a low appetite to equity, interest rate, inflation and currency risks, which we see as unrewarded, i.e. the return on capital for retaining the risk is lower than for hedging it. In order to stabilise our Solvency II surplus, we regularly monitor risk exposures and use a range of hedging instruments to remain within a Board-approved target range. Equity risk primarily arises from our exposure to a variation in future management fees on policyholder assets exposed to equities, while our currency exposure primarily arises from our foreign currency denominated debt. Our interest rate exposure principally relates to our shareholder credit portfolio, while our inflation exposures arises from both cost inflation expectations and inflation-linked policies.

 

Rewarded market risk sensitivities

We do however retain the credit risk in our c.£38 billion shareholder credit portfolio, and property risk in equity release mortgages, where we see these risks as rewarded. The shareholder credit assets are primarily used to back the Group's annuity portfolio. Exposure to these risks is needed to back growth in the Group's annuity portfolio. Stress testing is used to inform the level of risk to accept and to monitor exposures against risk appetite. We actively manage our portfolio to ensure it remains high quality and diversified, and to maintain our sensitivities within risk appetite. Our portfolio is c.99% investment grade and we have suffered no defaults, testament to the proactive approach taken by our in-house asset management team.

 

We also remain conservative in our property exposure. We have c.£4.5 billion of our credit portfolio exposed to equity release mortgages, which are all UK-based with an average rating of AA and average loan-to-value ('LTV') of 33%, and c.£1.1 billion in commercial real estate which is high quality and all UK-based with an average LTV of 47%. The full sensitivity we focus on for credit is a full letter downgrade of 20% of our credit portfolio, which is £(0.3) billion and is therefore small relative to the Group's £3.9 billion Solvency II surplus.

 

Managing demographic risks

We have three key demographic risks - lapse risk from early surrenders, longevity risk on our annuity portfolio and mortality risk on our protection book. We manage lapse risk through our strong customer proposition. Our longevity risk principally arises from our annuity book, but this is managed through reinsurance. We retain around half of this risk across our current in-force book, and reinsure most of this risk on new business. Mortality risk arises from our protection business and we seek to manage this as part of a well-diversified portfolio.

 

Life Company Free Surplus

Life Company Free Surplus represents the Solvency II surplus for the Life Companies that is in excess of their Board-approved CMPs. It is this Free Surplus from which the Life Companies remit cash to Group. We retain a significant Life Company Free Surplus of £2.2 billion which provides resilience to the Group's long-term cash generation.

 

Solvency II capital outlook

We maintain a 140-180% SCCR operating range, which reflects our low sensitivity to economic volatility due to our comprehensive hedging.

 

We have been at the top-end of our range for the past three years, but will invest some of this surplus as we transform our business, with the investment more front-end weighted across 2024-26. In addition, our intention to repay at least c.£500 million of debt by the end of 2026 will also reduce our SCCR over the coming years.

 

Leverage

We manage our leverage position by considering a range of factors including our cash interest cover, the interplay of our balance sheet hedging, and our capital tiering headroom. It also includes a number of output metrics that we monitor, such as the Fitch leverage ratio and Solvency II leverage ratio.

 

Our approach to leverage has always been to increase leverage to support M&A and then pay down that debt with surplus cash as it emerges. Since 2020 the Group has repaid c.£800 million of debt through this approach.

 

As at 31 December 2023, our Solvency II leverage ratio was 36% (2022: 34%). This increased in 2023, largely due to our investment in growth, integration and transformation. The Group's Fitch leverage ratio was 23% compared to full year 2022 on a restated basis of 23%,and is favourably below Fitch's stated range of 25-30% for an investment grade credit rating.

 

We plan to continue our approach of repaying M&A-related debt with surplus cash, and subject to regulatory approval, we intend to repay at least £500 million of debt by the end of 2026, including the £250 million Tier 2 bond that is callable in June 2024. This will support us in achieving a c.30%1 Solvency II leverage ratio by the end of 2026. This is a steady-state level of leverage that we will believe is the appropriate for our business, absent M&A.

 

1    Assuming economic conditions in line with 31 December 2023.

 

Earnings

£617m

Adjusted operating profit before tax APM

 

£4.6bn

Adjusted shareholders' equity APM

 

 

IFRS profit and loss statement

2023

20221,2

Pensions and Savings

£190m

£150m

Retirement Solutions

£378m

£349m

With-Profits

£10m

£54m

Europe and Other

£132m

£60m

Corporate Centre

£(93)m

£(69)]m

Adjusted operating profit before tax

£617m

£544m

Investment return variances and economic assumption changes

£147m

£(3,309)m

Amortisation and impairment of intangibles

£(322)m

£(353)m

Other non-operating items

£(439)m

£(262)m

Finance costs

£(195)m

£(199)m

Profit before tax attributable to non-controlling interest

£28m

£67m

Loss before tax attributable to owners

£(164)m

£(3,512)m

Tax credit attributable to owners

£76m

£855m

Loss after tax attributable to owners

£(88)m

£(2,657)m

 

1    2022 restated comparative to reflect adoption of IFRS 17

2    Incorporates changes to the Group's methodology for determining adjusted operating profit since Half Year 2023 (see note B1 to the consolidated financial statements for further details).

 

 

IFRS results

IFRS (loss)/profit is a GAAP measure of financial performance and is reported in our statutory financial statements on page 164 onwards. Adjusted operating profit before tax is a non-GAAP financial performance measure based on expected long-term investment returns. It is stated before amortisation and impairment of intangibles, other non-operating items, finance costs and tax. Please see the APM section on page 312 for further details of this measure.

On 1 January 2023, the Group adopted the new accounting standard, IFRS 17: 'Insurance Contracts', with comparatives restated from 1 January 2022. IFRS 17 requires a company to recognise profits as it delivers insurance services (rather than when it receives premiums) and to provide information about insurance contract profits the company expects to recognise in the future. The impact of the transition to IFRS 17 is set out in note A2.1.

 

IFRS loss after tax attributable to owners

The Group generated an IFRS loss after tax attributable to owners of £88 million (2022: loss of £2,657 million). The improvement versus 2022, primarily reflects a £3,456 million improvement in economic variances due to a much lower level of market volatility in the period, particularly interest rates. This has been partially offset by an increase in non-operating items as a result of our investment into growth in the period and ongoing migrations and transformation.

 

Basis of adjusted operating profit

Adjusted operating profit is based on expected investment returns on financial investments backing business where asset returns accrue to the shareholder and surplus assets over the reporting period, with allowance for the corresponding expected movements in liabilities (being the interest cost of unwinding the discount on the liabilities). Adjusted operating profit includes the unwind of the Contractual Service Margin ('CSM') and risk adjustment attributable to the shareholder. The principal assumptions underlying the calculation of the long-term investment return are set out in note B 2.1 to the IFRS consolidated financial statements.

 

Adjusted operating profit includes the effect of variances in experience relating to the current period for non-economic items, such as mortality and expenses. It also incorporates the impacts of asset trading optimisation and portfolio rebalancing where not reflected in the discount rate used in calculating expected return. Any difference between expected and actual investment return, along with other economic variances described further in note B1.1 are shown outside of adjusted operating profit. Adjusted operating profit is net of policyholder finance charges and policyholder tax.

 

Adjusted operating profit

The Group increased adjusted operating profit by 13% to £617 million (2022: £544 million). This primarily reflects strong growth in our Pensions and Savings business, which delivered adjusted operating profit of £190 million, an increase of 27% year-on-year (2022: £150 million). This was largely driven by higher AUA resulting in increased charges, and an improved margin through operating leverage.

 

Our Retirement Solutions business delivered an adjusted operating profit of £378 million (2022: £349 million). The 8% increase year-on-year primarily reflects a higher expected investment margin as a result of higher risk-free rates. The positive impact of BPA new business on CSM amortisation has offset the run-off of the remaining annuity book despite the phasing of a significant proportion of new business in late 2023.

 

With-Profits adjusted operating profit declined to £10 million (2022: £54 million) principally as a result of the run-off of this business and the adverse impacts of modelling refinements in the period.

 

Europe and Other adjusted operating profit increased to £132 million (2022: £60 million). This segment includes the expected investment margin from surplus assets within shareholder funds, which has increased due to the significant increases in interest rates over 2022. This has been partially offset by a reduction in CSM amortisation following the strengthening of the mortality assumptions on our Protection business.

 

The Group's Corporate Centre includes net operating costs in the period of £93 million (2022: £69 million), which increased due to investment in central functions to support our growth ambitions in the first phase of our journey, partially offset by increased interest income on Holding Company cash.

 

Investment return variances and economic assumption changes

The net positive economic variances of £147 million (2022: £3,309 million loss) results from a more stable market environment compared with the significant volatility experienced during 2022. The impact of positive changes to discount rates, primarily on annuities and including the impact of methodology refinements, more than offsets the losses arising from the impact of positive equity market movements on the hedges the Group holds to protect the Solvency II position. As the full value of future profits impacted by equity markets is not held on the IFRS balance sheet, this results in an 'over-hedged' position on an IFRS basis.

 

Amortisation and impairment of intangibles

The previously acquired in-force business, relating to IFRS 9 accounted capital-light fee-based products, is being amortised in line with the expected run-off profile of the investment contract profits to which it relates. The amortisation and impairment of acquired in-force business during the period of £316 million (2022: £347 million) has decreased year-on-year reflecting the impact of the business run-off. Amortisation and impairment of other intangible assets totalled £6 million in the period (2022: £6 million).

 

Other non-operating items

Other non-operating items in the period totalled a £439 million loss (2022: £262 million loss), inclusive of a £66 million gain recognised on the Sun Life of Canada UK acquisition. This includes £169 million expenditure to support our growth strategy and £36 million impact from setting up a new European subsidiary that was required post-Brexit to continue serving some of our overseas Heritage customers.

 

Other items include £217 million of costs relating to finance transformation activities, £111 million in respect of ongoing integration, transition and transformation projects, £12 million of other corporate project costs, and net other one-off items totalling £74 million, including costs associated with the Part VII transfer of three of the Group's Life insurance entities.

 

Lastly, finance costs of £195 million reflect interest borne on the Group debt instruments and were broadly stable year-on-year (2022: £199 million).

 

Tax charge attributable to owners

The Group's approach to the management of its tax affairs is set out in its Tax Strategy document which is available in the corporate responsibility section of the Group's website.

The Group tax credit for the period attributable to owners is £76 million (2022: £855 million tax credit) based on a loss (after policyholder tax) of £(164) million (2022: loss of £(3,512) million). A reconciliation of the tax charge is set out in note C8 to the Group financial statements.

 

Contractual Service Margin ('CSM')

The CSM represents a stock of future profits that will unwind into the P&L in future years.

 

The Group had a CSM (gross of tax) of £2.9 billion as at 31 December 2023, which grew by 10% in 2023 (2022: £2.6 billion) primarily due to new BPA business written, the acquisition of the SLOC in 2023, interest accretion and assumption changes, which was partly offset by the CSM release into the income statement.

 

The CSM release in the period represents c.8% of the closing CSM (gross of tax) pre release of £3.1 billion. We expect the release of the CSM (gross of tax) to be c.5-7% over time, primarily driven by annuities.

 

Assets under administration

AUA provides an indication of the potential earnings capability of the Group arising from its insurance and investment business, whilst AUA flows provide a measure of the Group's success in achieving growth from new business.

 

Group AUA as at 31 December 2023 was £282.5 billion (2022: £259.0 billion), an increase of 9% year-on-year. This increase was primarily driven by an £18.7 billion benefit from positive market and other movements and £8.0 billion relating to the SLOC acquisition. Net inflows in Workplace, Retirement Solutions, Europe and Other were £4.7 billion, £3.3 billion and £0.3 billion respectively, but these were offset by £1.6 billion of outflows in Retail and £9.9 billion of legacy outflows.

 

Outlook

The investments we are making across our strategic priorities will support strong growth in our IFRS adjusted operating profit before tax over the next few years.

 

We are targeting £900 million of IFRS adjusted operating profit in 2026, up from £617 million in 2023, reflecting a c.50% increase. This includes the majority of the £250 million cost savings as well as the impact of our organic growth and management actions.

 

We have an elevated level of non-operating costs at present, but we expect these to normalise after we are through our three-year investment programme. We have also suffered significant headwinds to shareholders equity from adverse economics over the past two years, primarily related to the significant rise in long-term interest rates and rise in equities. While future economic impacts are hard to forecast, we would expect to see some unwind of this adverse impact if interest rates return to normalised levels. We would also earn higher revenue from higher asset values in our Pensions and Savings business.

 

The other below the line items are more predictable and while we expect our shareholders' equity to decline over the coming years, we expect it to remain positive over the long term.

 

Our adjusted shareholders' equity, inclusive of the CSM, will remain broadly stable near-term and then begin to grow. Supported by strong CSM growth from our annuities business and other management actions.

 

As a reminder, our Group consolidated shareholders' equity is not a constraint to the payment of our dividends. This is because our dividends are paid from the Phoenix Group Holding Company, which is not impacted by IFRS 17 and has c.£4.6 billion of distributable reserves.

 

 

Movement of IFRS 17 adjusted shareholders' equity over 2023

 

 

Capital allocation

52.65p

Total 2023 dividend per share

 

+2.5%

Final 2023 dividend increase

 

 

2023 dividend increase

Phoenix has demonstrated a strong dividend track record over the past 13 years, with a c.4% compound annual growth rate ('CAGR') since 2011. Our strong strategic and financial performance in 2023 has supported a 2.5% recommended increase in the Final 2023 dividend to 26.65p per share, taking the Total dividend to 52.65p per share.

 

New capital allocation framework for the next phase of our journey

As we embark on the next stage of our journey, we are outlining a new capital allocation framework.

 

There are two key underpins to our framework. The first is that we will operate a progressive and sustainable ordinary dividend policy. The second is that we will maintain our strong and resilient balance sheet, by operating within a 140-180% Shareholder Capital Coverage Ratio range.

 

We will seek to balance the investment of our 2024-2026 surplus capital across our strategic priorities of grow, optimise and enhance.

 

In our Grow strategic priority, we will invest c.£100 million into developing our growth propositions and c.£200 million of capital per annum to grow our annuities.

 

In our Optimise strategic priority, we will continue our approach of repaying M&A-related debt using surplus cash, with an intention to repay at least £500 million of debt by the end of 2026. This will support a Solvency II leverage ratio of c.30%1 by the end of 2026. We will also invest c.£100 million into our asset and liability optimisation capabilities to support recurring managements over the long term.

 

In our Enhance strategic priority, we will invest c.£500 million on migration, transformation and cost efficiency programmes bringing our businesses onto a single Group-wide operating model that will further enhance our cost efficiency.

 

Additional surplus capital, over and above these committed investments, will be allocated to the highest return opportunities. This could include additional investment into growth, further deleveraging, M&A, and/or additional capital return to shareholders.

 

1    Assuming economic conditions in line with 31 December 2023.

 

New progressive dividend policy

The Board has evolved Phoenix's dividend policy to reflect the confidence it has in the Group's strategy. The Group will now operate a progressive and sustainable ordinary dividend policy.

 

The Board will continue to announce any potential annual dividend increase alongside the Group's Full Year results and expects the Interim dividend to be in-line with the previous year's Final dividend. The Board will continue to prioritise the sustainability of our dividend over the very long term. Future dividends and annual increases will continue to be subject to the discretion of the Board, following assessment of longer-term affordability.

 

 

Outlook

Growing Operating Cash Generation that more than covers our recurring uses and supports our new progressive and sustainable ordinary dividend policy.

Looking ahead

Our purpose is to help people secure a life of possibilities. The continued execution against our three strategic priorities of Grow, Optimise and Enhance, will support us in delivering strong financial outcomes for our shareholders.

 

Clear financial outcomes for shareholders

We have a new set of ambitious 2026 targets, across our evolved financial framework of cash, capital and earnings.

 

Starting with cash, Phoenix has set three new cash generation targets. The first is that we expect Operating Cash Generation to grow to £1.4 billion in 2026, a c.25% increase from 2023. This growth underpins our Total cash generation target, with a one-year target for 2024 of £1.4-1.5 billion, and a three-year target of £4.4 billion across 2024-2026.

 

Our cash targets demonstrate our confidence in our ability to deliver sustainable, growing cash generation over time.

 

In terms of capital, we will continue to maintain a strong Solvency II balance sheet through our comprehensive hedging approach. This will see us continue to operate within our Solvency II SCCR operating range of 140-180% and continue to manage our key individual risk sensitivities on a Solvency II surplus basis.

 

 

Our intention to repay at least £500 million of debt by the end of 2026. This will support us on our path towards a c.30% Solvency II leverage ratio by the end of 2026, which is an appropriate steady-state level for our business absent M&A.

 

Turning to earnings, we are targeting IFRS adjusted operating profit to grow c.50% to £900 million in 2026, as we grow, optimise and enhance our business. This will include the majority of the c.£250 million of annual cost savings we aim to deliver by the end of 2026.

 

We expect the improving macroeconomic outlook, with interest rates and inflation normalising, to support our future growth ambitions and targets.

 

Delivering against the targets across our evolved financial framework of cash, capital and earnings, in turn supports our new progressive and sustainable ordinary dividend policy.

 

2024 will be another exciting year for Phoenix Group on our journey and as we continue to deliver on our purpose and our strategy.

 

 

Rakesh Thakrar

Group Chief Financial Officer

 

 

Growing Operating Cash Generation supports our new progressive dividend policy

 

 

We have a clear set of supporting targets:

 

Cash

£1.4 billion Operating Cash Generation in 2026

£4.4 billion of Total cash generation across 2024-2026

£1.4-to-£1.5 billion of Total cash generation in 2024

 

Capital

140-180% Shareholder Capital Coverage Ratio operating range

Solvency II leverage ratio of c.30% by the end of 2026

 

Earnings

Targeting £900 million of IFRS adjusted operating profit in 2026

c.£250m of annual cost savings by 2026

 

 

 

 

 

 

Principal risks and uncertainties facing the Group

The Group's principal risks and uncertainties are detailed in this section, together with their potential impact, mitigating actions in place and any change in risk exposure since the Group's 2022 Annual Report and Accounts, published in March 2023.

 

A principal risk is a risk or combination of risks that can seriously affect the performance, future prospects or reputation of the Group, including risks that would threaten its business model, solvency or liquidity. The Board Risk Committee has carried out a robust assessment of principal risks and emerging risks. As a result of this review, the 13 risks noted in the Group's 2022 Annual Report and Accounts have been retained. The articulation of the principal risks related to transitioning acquired businesses and Environmental, Social and Governance ('ESG') has been refined to reflect the evolution of how these risks could impact the Group. The overall level of risk exposure for ESG risks is now reported as 'Heightened' for the first time since introduction in 2019, in recognition of the external headwinds which could impact the Group's ability to effectively manage sustainability risks.

 

Both strategic and operational risk categories contain multiple principal risks; risks in these categories are broadly ordered for their relevance to enabling the Group to achieve its strategic priorities.

 

Further details of the Group's exposure to financial and insurance risks and how these are managed are provided in note E6 and F11 to the IFRS consolidated financial statements.

 

 

Strategic priorities

1 Grow
2 Optimise

3 Enhance

 

 

Impact

Mitigation

Change from 2022 Annual Report and Accounts

Strategic risk The Group fails to deliver long-term organic cash generation in line with its Annual Operating Plan         1 3

Confidence in the Group might be diminished if it fails to deliver organic cash generation in line with targets shared, particularly as the Group seeks to support people by offering a wide range of solutions to help customers journey to and through retirement.

The Group's business unit structure brings focus and accountability. The key areas of growth are Pensions and Savings and Retirement Solutions.

Each business unit holds an annual strategy setting exercise to consider the needs of potential and existing customers, the interests of shareholders, the competitive landscape and the Group's overall purpose and objectives.

The Group's Annual Operating Plan commits it to making significant investment in its growth businesses, including propositional enhancements driven by customer insight.

The Group is established in the Bulk Purchase Annuity ('BPA') market and continues to invest in its operating model to further strengthen its capability to support its growth plans.

For new BPA business, the Group continues to be selective and proportionate, focusing on value not volume, by applying its rigorous Capital Allocation Framework.

 

Unchanged

The Group viewed this risk as 'Improving' in the 2022 Annual Report and Accounts, reflecting the demonstrated success of the strategy to pursue organic cash generation; this view of the level of risk exposure is unchanged.

The Group has delivered strong organic growth in 2023, with new business net fund flows of c. £7bn, compared to £3.9bn in 2022. This is in line with the Group's strategy to deliver a balanced business mix through leveraging its scale in the capital-light fee-based businesses and maintaining a disciplined level of growth in annuities.

As a result of this strong performance, the Group has delivered c. £1.5bn of total new business long-term cash generation in 2023, achieving its 2025 target two years early.

During 2023, the Group completed BPA transactions with a combined premium of c. £6bn, compared to £4.8bn in 2022. This continues to demonstrate that the Group has the ability to compete and win in the BPA market.

In September, the Group launched the Standard Life Pension Annuity to the open market in the UK, becoming the first new provider to enter the annuity market since the introduction of Pension Freedoms legislation in 2015.

The Pensions and Savings business, operating under the Standard Life brand, has developed its operating model to centre around three trading channels: Workplace, Retail Intermediated and Retail direct.

The Workplace business continues to attract good flows in, delivering net fund flows of c. £4.5bn in 2023, nearly double the £2.4bn delivered in 2022. This is supported by c. £2bn of new scheme assets transferred in 2023, including the Siemens workplace scheme, which represents one of the largest scheme transfers to have been tendered in the UK market in recent years, demonstrating the strength of the Group's proposition.

The operating model and organisational design are being developed and implemented for the Retail businesses, with the aim of maximising opportunities for growth, both directly and through advisers, from new and existing customers. During 2023, £1.079bn of assets were internally transferred to Retail direct to enable existing customers to access modern pension offerings to support them to and through retirement.

The Group is looking to expand the current offering of financial guidance and advice to support customers in better preparing for their retirement.

Strategic risk continued The Group's strategic partnerships fail to deliver the expected benefits     1 2 3

Strategic partnerships are a core enabler for delivery of the Group's strategy; they allow it to meet the needs of its customers and clients and deliver value for its shareholders. The Group's end state operating model will leverage the strengths of its strategic partners whilst retaining in-house key skills which differentiate it from the market.

However, there is a risk that the Group's strategic partnerships do not deliver the expected benefits leading to adverse impacts to customer outcomes, strategic objectives, regulatory obligations and the Group's reputation and brand.

Some of the Group's key strategic partnerships include:

abrdn plc: Provides investment management services to the Group including the development of investment solutions for customers. abrdn plc manages c. £154bn of the Group's assets under administration, at December 2023.

HSBC plc: Provides custody and fund accounting services to the Group to manage c. £165bn of its unit linked operations.

TCS Diligenta: The Group's partnership covers a range of services including customer administration and digital and technology capabilities to support customer outcomes.

The Group has in place established engagement processes and a rigorous governance structure to manage relationships with its strategic partners, in line with the Group's Supplier Management Model.

The Group takes steps to monitor its supplier concentration risks and has business continuity plans to deploy should there be a significant failure of a strategic partner.

Unchanged

The Group assessed this risk as 'Heightened' in the 2019 Annual Report and Accounts due to the increased dependency it placed on its strategic partnerships, and then 'Improved' in 2020 due to strengthening controls around the operation of those partnerships. Whilst the Group has further strengthened and simplified its strategic partnerships since that time, its assessment of the level of risk exposure is unchanged from the 2020 position, reflecting the Group's ongoing reliance on its strategic partners to deliver the volume of change needed to advance the Group's strategic objectives.

The Group continues to develop its partnership with TCS Diligenta to support its strategic deliverables. The successful migration of another 700,000 Phoenix Life customer policies to TCS Diligenta's BaNCS platform was completed in November 2023. Planning for further migrations in 2024 and beyond is underway.

During 2023 the Group successfully transferred the custody and fund accounting services for £12.3bn of assets to HSBC plc. This is a key milestone in the Group's journey towards implementing harmonised investment administration processes, and boosts its strategic partnership with HSBC plc.

 

Strategic risk continued The Group fails to effectively transition acquired businesses      1 2 3

The Group is exposed to the risk of failing to transform, simplify and better integrate the component parts of our acquired businesses to deliver leading customer experiences and realise scale efficiencies successfully and efficiently.

The transition of acquired businesses into the Group, including customer migrations, could introduce structural or operational challenges that, without sufficient controls, could result in the Group failing to deliver the expected outcomes for customers or achieve the efficiencies of its target operating model.

Integration plans are developed and resourced with appropriately skilled staff to ensure target operating models are delivered in line with expectations. The Group's priority at all times is on delivering for its customers. Customer migrations are planned thoroughly with robust execution controls in place. Lessons learned from previous migrations are applied to future activity to continuously strengthen the Group's processes.

The Group views future M&A activity as an optional strategy accelerant and will assess new inorganic growth opportunities against a clear set of criteria and seeks to execute those opportunities which score positively against these criteria.

The Group's acquisition strategy is supported by the Group's financial strength and flexibility, strong regulatory relationships and its track record of generating shareholder value and delivering good customer outcomes.

The financial and operational risks of target businesses are assessed in the acquisition phase and potential mitigants are identified which may include temporary capital or liquidity buffers.

 

Unchanged

This risk was assessed as 'Heightened' in the Group's 2018 Annual Report and Accounts due to the transformational nature of the Standard Life acquisition. The assessment of the level of exposure to this risk is unchanged from the 2018 position due to the volume of ongoing transition and integration activity.

The Group has worked to transform from a financial engineering business to a purpose-led, organically growing business. Focus is now on pivoting to transform and simplify the business in the next phase of our journey.

The Group continues to develop its partnership with TCS Diligenta to support its target operating model. Further customer migrations to TCS Diligenta's BaNCS platform are planned in upcoming years, which will support delivery of the Group's target operating model and enable all Phoenix policies to benefit from a more advanced administration platform. The key risk in respect of migration activity is that the time, and associated cost, to deliver these whilst protecting customer outcomes is greater than expected and the Group regularly assesses its reserving basis as a result.

In April 2023 the Group completed the acquisition of Sun Life of Canada UK, a closed book UK life insurance company, from Sun Life Assurance Company of Canada. The integration is progressing well, with the majority of functions due to complete activity in April 2024.

The Group has now delivered c. 20% of the targeted c. £500m incremental long-term cash generation target from this acquisition, with the remainder due to emerge in 2025 and 2026.

Strategic risk continued The Group does not have sufficient capacity and capability to fully deliver its significant change agenda which is required to execute the Group's strategic objectives            1 2 3

The Group's ability to deliver change on time and within budget could be adversely impacted byinsufficient resource and capabilities as well as inefficient prioritisation, scheduling and oversight of projects. The risk could materialise within both the Group and its strategic partners.

This could result in the benefits ofchange not being realised by the Group in the time frame assumed in its business plans and may result in the Group beingunable to deliver its strategicobjectives. Poor change delivery could affect the Group's ability to operate its core processes in a controlled and timely manner.

The Group's Change Management Framework defines a clear set of prioritisation criteria and scheduling principles for new projects. This is to support the safe and controlled mobilisation of change in line with capacity and risk appetite and to strengthen business readiness processes to deliver change safely into the operational environment. These prioritisation principles are a core part of the Annual Operating Plan process, alongside a significant focus on the deliverability of the change portfolio in 2024.

Information setting out the current and forecast levels of resource supply and demand continues to be provided to accountable Senior Management to enable informed decision-making. This aims to ensurethat all material risks to project delivery are appropriately identified, assessed, managed, monitored and reported.

Unchanged

Whilst significant progress has been made on developing the change capability and capacity, there has been no change to the assessment of exposure to this risk since its introduction in the 2020 Annual Report and Accounts, which reflects the potential impact of failing to deliver the Group's significant strategic and regulatory change agenda.

The Group has continued to strengthen its Change Management Framework during 2023 and expects to see an improving trend in this risk as those enhancements are seen in project delivery, noting that the Group has a number of multi-year change programmes so benefits will emerge in 2024 and beyond. The Group's Chief Operating Officer is driving further enhancements to evolve and mature the Group's change operating model. In 2023 this included significant effort being put into the recruitment of senior change professionals, alongside the assessment and further development of all internal change resources.

Strategic risk continued The Group fails to appropriately prepare for and manage the effects of climate change and wider ESG risks                1 2 3

The Group is exposed to the risk of failing to respond adequately to ESG risks and delivering on its purpose; for example, failing to meet and make its sustainability commitments.

A failure to manage ESG risk could result in adverse customer outcomes, reduced colleague engagement, reduced proposition attractiveness, reputational risks and litigation.

The Group is exposed to risks arising from the transition to a lower-carbon economy, which could result in a loss in the value of policyholder and shareholder assets.

In addition, physical risk can give rise to financial implications, such as direct damage to assets, operational impacts either direct or due to supply chain disruption, and impacts on policyholder health and wellbeing, impacting demographic experience.

The Group has a clear sustainability strategy in place which is updated annually to reflect the Group's latest plans and risk exposures, with key metrics on progress monitored throughout the year.

Sustainability risk and climate risk are both embedded into the Group's RMF.

Sustainability risk 'cross-cuts' the Group's Risk Universe. This means the consideration of material sustainability-related risks is embedded in the Group's risk policies, with regular reporting undertaken to ensure ongoing visibility of its exposure to these risks. Several sustainability-related risk policies are also in place to cover the main sources of sustainability risk.

The Group is making good progress on integrating the management of climate change and wider ESG risks across the business, including in investment portfolios, with further work underway to embed its consideration fully across the business.

The Group continues to engage with suppliers and asset managers on their progress and approach to managing climate change and wider ESG risks.

The Group undertakes annual climate-related stress and scenario testing and continues to build its climate scenario modelling capabilities.

The Group undertakes deep dives on emerging ESG risk areas (such as greenwashing and ESG litigation risk) to increase understanding and awareness for Boards and Management, and facilitate control improvements where required.

Heightened

This risk is considered 'Heightened' for the first time since its introduction as a principal risk in the 2019 Annual Report and Accounts.

The key driver for this change is the rapidly evolving external ESG environment. In particular, the increasing politicalisation and weakening of government policies in relation to ESG risk (such as that of the UK Government) as this could delay the necessary actions to transition to a low carbon economy, making the potential future crystallisation of physical climate events increasingly likely.

Anti-climate change and ESG sentiment, particularly in high carbon-emitting countries, could have far-reaching consequences for the pace and effectiveness of climate action and continue to slow down policy changes. This could limit future ESG-aligned investment opportunities and make it more difficult for the Group to manage ESG risk and meet its climate commitments.

Recent reports from bodies such as the Intergovernmental Panel on Climate Change and the United Nations Environment Programme highlight the slow progress and significant scale of the challenge in restricting global warming below 1.5°C. Real world events are occurring at a high rate, with 2023 setting the record for the hottest year ever on record.

The Group is cognisant of this changing environment and undertakes thought leadership and wide engagement with policymakers and market participants to actively raise the debate around key sustainability themes.

Analysis indicates the Group is on track to achieve its 2025 targets if planned actions are implemented. However, further internal actions will likely be needed to achieve the 2030 targets, which are also increasingly dependent on external factors such as the decarbonisation of the wider economy and actions by others - in particular government, regulators, and the high transition risk sector.

Customer risk The Group fails to deliver good outcomes for its customers or fails to deliver propositions that continue to meet the evolving needs of customers 1 2

The Group is exposed to the risk that it fails to deliver good outcomes for its customers, leading to adverse customer experience and potential customer harm. This could also lead to reputational damage for the Group and/or financial losses.

In addition, a failure to deliver propositions that meet the evolving needs of customers may result in the Group's failure to deliver its purpose of helping people secure a life of possibilities.

The Group's Conduct Risk Appetite sets the boundaries within which the Group expects customer outcomes to be managed.

The Group's Conduct Strategy, which overarches the Risk Universe and all risk policies, is designed to detect where customers are at risk of poor outcomes, minimise conduct risks, and respond with timely and appropriate mitigating actions.

The Group has a suite of customer policies that set out key customer risks and the Control Objectives that determine the Key Controls required to mitigate them.

The Group maintains a strong and open relationship with the FCA and other regulators, particularly on matters involving customer outcomes.

The Group's Proposition Development Process ensures consideration of customer needs and conduct risk when developing propositions.

Unchanged

There has been no change to the overall level of exposure to this risk since it was introduced in the 2018 Annual Report and Accounts.

The FCA's Consumer Duty represents a step change in approach for the industry, re-enforcing a shift away from a rules-based regime to principles-based regulation. The Duty introduces an overarching requirement that firms, and their employees, must act to deliver good outcomes for retail customers. In response, the Group mobilised a programme of work to implement the changes required to achieve its interpretation of compliance in line with the key regulatory deadlines of end-April 2023, end-July 2023 and end-July 2024.

Despite having met the first two deadlines, the Group's view is that the risk exposure around the Duty is elevated whilst the supervisory approach matures, and closed products are reviewed against the Duty's principles, most notably fair value, ahead of the end-July 2024 deadline. The Group has built on its strong foundations, enhancing existing and creating new Group frameworks, processes and strategies to meet Duty requirements. This includes a Fair Value Framework designed to assess value in its broadest definition and refreshing the Conduct Strategy to embed and maintain the culture of the Group, informed by monitoring behaviours and customer outcomes.

The FCA is raising the bar in terms of expectations on firms to ensure and evidence good outcomes are being achieved for their customers. The FCA continues to provide guidance to the industry to support firms' plans to embed the Duty within their businesses. It also recognises that its own understanding and development of guidance and its supervisory approach will continue to evolve.

The Group continues to monitor the impacts of the cost-of-living crisis on its customers. Proactive action to support customers, including those most vulnerable, is a priority. The Group is using customer behaviour research and analysis to provide customers with the support and help that they need. This has included improving all brand websites to provide general cost-of-living support, encouraging customers to get in touch for help and including links to external support websites.

Operational risk The Group or its outsource partners are not sufficiently operationally resilient       1 2 3

The Group is exposed to the risk of causing intolerable levels of disruption to its customers and stakeholders if it cannot maintain the provision of important business services when faced with a major operational disruption. This could occur either in-house or within the Group's primary and downstream outsource partners, and be triggered by a range of environmental and climatic factors such as the cost-of-living crisis and adverse weather phenomena.

The Group regularly conducts customer migrations as part of transition activities in delivering against its strategic objectives. In doing so, it faces the risk of interruption to its customer services, which may result in the failure to deliver expected customer outcomes.

Regulatory requirements for operational resilience, and a timetable to achieve full compliance, were published in March 2021. Whilst the specific requirement to work within set impact tolerances takes effect in March 2025, the Group is already exposed to regulatory censure in the event of operational disruption should the regulator determine that the cause was a breach of existing regulation.

The Group's Operational Resilience Framework enhances the protection of customers and stakeholders. It is designed to prevent intolerable harm and supports compliance with the regulations. The Group continues to work closely with its outsource partners to ensure that the level of resilience delivered is aligned to the Group's impact tolerances.

The Group has already taken some action, through previous strategic transformation activity, to reduce exposure to technological redundancy and key person dependency risk, increasing the resilience of its customer service. It continues to do so where further exposure is identified.

The Group regularly reviews important business service MI to ensure appropriate action is taken to rectify and prevent customer harm. The Group is working to further strengthen and enhance the overall resilience of the Group and its outsource partners by March 2025 through its Operational Resilience Remediation Project.

The Group and its outsource partners have well-established business continuity management and disaster recovery frameworks that are annually refreshed and regularly tested. Disruption events are used to assess lessons learned to identify any continual improvements to be made.

Unchanged

This strategic risk has been assessed as 'Heightened' in the Group's Annual Report and Accounts since 2020.

Key drivers of this assessment are the increasing threat of cyber-attacks and the Group's dependency on its outsource partners to have appropriate resilience to operational disruption.

The Group has a significant change and customer migration agenda over the next three to five years, effective completion of which is required to deliver planned strengthening of its operational resilience both internally and with some material outsourced service providers. This exposes the Group to increased risk. However, this is mitigated through strengthened Operational Resilience and Change Management Frameworks, where the risk of late delivery is actively managed by both the relevant change programme and separate operational resilience remediation governance and reporting.

The quantum of strategic customer transformation activity requires subject matter expertise to execute successfully. The Group's operational resilience, internally and with material third parties, would be impacted by a large-scale loss of colleagues, for example due to illness or incapacity such as influenza, in the UK or globally. Such impacts are difficult to mitigate in the short-term; however, the Group and material suppliers made substantial investments in remote working capability to manage the impacts of COVID-19, which would be expected to help mitigate the impacts of a further pandemic to service continuity.

Operational risk continued The Group is impacted by significant changes in the regulatory, legislative or political environment    1 2 3

Changes in regulation could lead to non-compliance with new requirements that could impact the quality of customer outcomes, lead to regulatory sanction, impact financial performance or cause reputational damage. These could require changes to working practices and have an adverse impact on resources and financial performance.

Political uncertainty or changes in the government could see changes in policy that could impact the industry in which the Group operates.

The Group undertakes proactive horizon scanning to understand potential changes to the regulatory and legislative landscape. This allows the Group to understand the potential impact of these changes to amend working practices to meet the new requirements by the deadline.

The Group engages with many political parties and industry bodies to foster collaboration and inspire change which supports the Group's purpose of helping customers secure a life of possibilities.

Unchanged

This risk was assessed as 'Heightened' in the Group's 2021 Annual Report and Accounts due to the uncertainty around Solvency II reforms and the FCA's proposed Consumer Duty. These, and the significant undertaking to achieve compliance with IFRS 17 in 2023, were the key drivers of the assessment of risk as further 'Heightened' in the 2022 Annual Report and Accounts and the current assessment is unchanged from that position.

The volatile political environment remains 'Heightened' ahead of worldwide elections in 2024, including an expected UK General Election. The current administration continues to face economic headwinds, management of which has implications for the Group's customer base, including the cost-of-living crisis, increased borrowing costs and the potential increase in vulnerability.

In June 2023, HMT published draft legislation related to the Solvency II reforms, indicating the reform implementation would be staged with some reforms coming into force on 31 December 2023 and the remainder on 30 June 2024. The Prudential Regulation Authority ('PRA') has since issued two of three anticipated consultations on the rules to implement those reforms in H2 2023, and its near final policy to go live at year-end 2024, relating to Internal Models, Transitional measures on Technical Provisions and Group supervision. Internal teams are reviewing the detail to assess what actions are needed to ensure the Group is compliant with the new rules.

The Group supports the PRA and HMT's objectives to reform the regulations to better suit the UK market whilst maintaining appropriate safeguards for policyholders. The financial impact of the reforms will depend on the exact detail of the final legislation. The relatively short time period between the PRA's final Policy Statement and the implementation date of the new rules contributes to the status of this risk. The Group will therefore remain actively involved in industry lobbying on Solvency II and is preparing as much as possible ahead of time to ensure compliance with new rules at the point of implementation.

The Group views the FCA's Consumer Duty as well aligned to its strategic priority of helping people secure a life of possibilities and, from 31 July 2023, the Group is materially compliant with the Duty for its open products. Focus remains on reviewing customer journeys and fair value assessments for closed products to achieve compliance with the Duty's principles for these products ahead of the 31 July 2024 deadline.

In November 2023 the FCA issued Sustainability Disclosure Requirements and investment labelling requirements which aim to inform and protect consumers and improve trust in the market for sustainable investments. The Group supports the FCA's aims noting that terminology used and a lack of consistency between providers makes it difficult for consumers to navigate. The Group has mobilised a project to ensure its practices align with the new regulation.

In December 2023, the FCA issued the Advice Guidance Boundary Review consultation paper. The consultation could lead to a significant change in the way that people who cannot access advice are supported in the industry and the Group is actively engaging with the FCA on this topic.

IFRS 17 aims to standardise insurance accounting across the industry and achieving compliance has been a significant undertaking. The Group will continue its finance transformation programme in 2024 to further streamline and automate IFRS 17 processes to support efficient financial reporting in the future.

Operational risk continued The Group or its supply chain are not sufficiently cyber resilient             2 3

Phoenix Group is the UK's largest long-term savings and retirement business, with a significant profile, which leads to greater interest from cyber criminals. The world continues to become increasingly digitally connected and cyber-attacks remain a major threat to the Group. Over the past five years the Group has grown from 5m to 12m customers, while the number of colleagues in the Group has grown from 900 to over 7,500, not including contractors. In addition, the Group's footprint includes engagement with c. 1,800 suppliers which increases the attack surface significantly. This continual growth poses a greater risk of cyber-attack which could have a significant impact on customer outcomes, strategic objectives, regulatory obligations and the Group's reputation and brand.

Based on external events and trends, the threat posed by a cyber security breach remains high and the complexity of the Group's increasingly interconnected digital ecosystem exposes it to multiple attack vectors. These include phishing and business email compromise, hacking, data breach and supply chain compromise.

Increased use of online functionality to meet customer preferences and flexible ways of working, including remote access to business systems, adds additional challenges to cyber resilience and could impact service provision and customer security.

The pace of change is accelerating due to the rapid rise of artificial intelligence ('AI'), which in turn is compounding the threats and as a result, the cyber world is a more dangerous place than ever before. AI also has the potential to improve cyber security by dramatically increasing the timeliness and accuracy of threat detection and response. Cyber security is an essential pre-condition for the safety of AI systems and is required to ensure resilience, privacy, fairness, reliability and predictability.

The Group is continually strengthening its cyber security controls, attack detection and response processes, identifying weaknesses through ongoing assessment and review.

The Enterprise Information Security Strategy includes a continuous Information Security and Cyber Improvement Programme, which is driven by input from the Annual Cyber Risk Assessment and Annual Cyber Threat Assessment that utilises internal and external threat intelligence sources.

The Group continues to consolidate its cyber security tools and capabilities and the Enterprise Information Security Strategy 2023-2025 includes delivery of a Group Identity Platform and Zero Trust model, Supplier Assurance Platform, Secure Cloud Adoption and proactive Data Loss Prevention.

The specialist second line Information Security and Cyber Risk team provides independent oversight and challenge of information security controls, identifying trends, internal and external threats and advising on appropriate mitigation solutions.

The Group continues to enhance and strengthen its outsourced service provider and third-party oversight and assurance processes. Regular Board, Executive, Risk and Audit Committee engagement occurs within the Group.

The Group holds ISO 27001 Information Security Management Certification for its Workplace Pension and Benefits schemes, which provides confidence to both clients and internal stakeholders that it is committed to managing security.

Unchanged

This risk was assessed as 'Heightened' in the Group's 2022 Annual Report and Accounts and this remains unchanged.

The UK cyber threat level remains elevated, due to the sustained Russia/Ukraine war, China/Taiwan tensions, and the addition of the Israel/Palestine armed conflict. Cyber threat levels remain high with increased likelihood of a cyber-attack from a State actor; however it is highly unlikely that a Nation State actor would directly target the Group and any impact would be as a result of indirect cyber-attacks against the UK's critical national infrastructure, IT or information security service providers or global financial services companies. Cyber criminals continue to be the Group's most likely threat, primarily due to the type of data held by financial sector organisations being attractive to criminal actors.

On 19 April 2023, the UK's National Cyber Security Centre issued an alert warning of a heightened risk from attacks by state-aligned Russian hacktivists, urging all organisations in the country to apply recommended security measures.

The Group's cyber controls are designed and maintained to repel the full range of cyber-attack scenarios; whilst the Group's main threat is considered to be cyber crime, from individuals or organised crime groups, the same controls are utilised to defend against a Nation State-level cyber-attack.

The single consolidated Group Supplier Information Security Framework, which is improving the Security Oversight and Assurance of the Group's large portfolio of Outsourced Service Providers ('OSP'), third- and fourth-party suppliers, continues to mature. Further embedding and maturing over the next 12 months will help mitigate the risks associated with supply chain cyber security, which is considered the Group's top cyber security threat.

Vulnerability management continued to mature throughout 2023 with the Enterprise Cyber Exposure Score ('CES') remaining steady. The Group received formal approval from the FCA and PRA in July 2023 for closure of the Cybersecurity Best Practice Evaluation and Testing ('CBEST') remediation programme.

Operational risk continued The Group fails to retain or attract a diverse and engaged workforce with the skills needed to deliver its strategy   1 2 3

Delivery of the Group's strategy is dependent on a talented, diverse and engaged workforce.

This risk is inherent in the Group's business model given the nature of acquisition activity and specialist skill sets.

Potential areas of uncertainty include the ongoing transition of ReAssure businesses into the Group, the expanded strategic partnership with TCS Diligenta and the introduction of the flexible working model.

Potential periods of uncertainty could result in a loss of critical corporate knowledge, unplanned departures of key individuals, or the failure to attract and retain individuals with the appropriate skills to help deliver the Group's strategy.

This could ultimately impact the Group's operational capability, its customer relationships and financial performance.

The Group aims to attract and retain colleagues from all backgrounds by creating a shared sense of purpose and commitment to our strategy, supported by offering competitive terms and conditions, benefits, and flexibility. Monthly colleague surveys promote continuous listening, allow rapid identification of concerns and actions that help improve engagement. The Group looks to respond proactively to external social, economic and marketplace events that impact colleagues.

The increased scale and presence of the Group, and success in multi-site and remote working, gives greater access to a larger talent pool to attract and retain in the future. In addition, the Group's graduate and early career programmes helps to support the talent pipeline.

Unchanged

There has been no change to the overall level of exposure to this risk since it was introduced in the 2018 Annual Report and Accounts. This is driven by acknowledgement of the significant amount of integration activity within the Group and uncertainty regarding the longer-term social and marketplace impacts of the pandemic and cost-of-living crisis on colleague attrition, sickness, motivation and engagement. Skills essential to the Group continue to be in high-demand in the wider marketplace. The Group monitors this closely and continues to remain confident in the attractiveness of its colleague proposition.

The Group launched Midlife MOT assessments to help colleagues take stock in the key areas of wealth, work and wellbeing.

The Group continues to leverage apprenticeships to support workforce diversity and to fill key skills, creating bespoke graduate and early careers programmes for specialist technical areas.

The Group continues to successfully operate a flexible working model, with strategic investments in technology and other resources maximising its effectiveness. The Group introduced Phoenix Flex as a core part of its employee offering in 2023, to help support colleagues in balancing their personal and professional lives, by encouraging and celebrating flexibility at work, embracing differences, and helping colleagues to thrive.

Market risk Adverse investment market movements or broader economic forces can impact the Group's ability to meet its cash flow targets, along with the potential to negatively impact customer investments or sentiment 1 2 3

The Group and its customers are exposed to the implications of adverse market movements. This can impact the Group's capital, solvency, profitability and liquidity position, fees earned on assets held, the certainty and timing of future cash flows and long-term investment performance for shareholders and customers.

There are a number of drivers for market movements including government and central bank policies, geopolitical events, market sentiment, sector-specific sentiment, global pandemics and financial risks of climate change, including risks from the transition to a low carbon economy.

The Group undertakes regular monitoring activities in relation to market risk exposure, including limits in each asset class, cash flow forecasting and stress and scenario testing. In particular, the Group's increase in exposure to residential property and private investments, as a result of its BPA investment strategy, is actively monitored.

The Group continues to implement de-risking strategies and control enhancements to mitigate unwanted customer and shareholder outcomes from certain market movements, such as equities, interest rates, inflation and foreign currencies.

The Group maintains cash buffers in its holding companies and has access to a credit facility to reduce reliance on emerging cash flows.

The Group closely monitors and manages its excess capital position and it regularly discusses market outlook with its asset managers.

Unchanged

This risk was assessed as 'Heightened' in the Group's 2019 Annual Report and Accounts, and then again in 2020 due to ongoing economic uncertainty, geopolitical tensions, the impacts of COVID-19 and uncertainty around interest rates. Whilst some of these have lessened, they remain the key drivers for the current assessment of exposure to this risk.

The global macro-economic environment remains highly uncertain; although prices continue to rise, the rate of inflation is lower. The UK Consumer Price Index is down to 4.0% in January 2024 from a peak of 11.1% in October 2022. There is an increased expectation that the Bank of England will achieve its target of 2% by the end of 2025.

The Bank of England base rate has increased from 0.1% in December 2021 to 5.25% in August 2023, and remains at this level, with the outlook for this to remain stable until summer 2024 before reductions can be expected. Higher interest rates, coupled with cost-of-living rises, have suppressed residential property prices. These are expected to bottom out in summer 2024 and see a return to growth after interest rates start to come down. UK gilt yields remain high, rivalling the levels seen during the 2022 mini-budget market event. The Group continues to monitor and manage its market risk exposures, including to interest rates and inflation, and to markets affected by the increasing number of geopolitical conflicts and concerns. For example, continued attacks on shipping in the Red Sea pose a risk of worsening inflationary pressures and the downstream effects on interest rates. The Group's strategy continues to involve hedging the major market risks and, in 2023, the Group's Stress and Scenario testing programme continued to demonstrate the resilience of its balance sheet to market stresses. Contingency actions remain available to help manage the Group's capital and liquidity position in the event of unanticipated market movements.

Insurance risk The Group may be exposed to adverse demographic experience which is out of line with expectations 1 2

The Group has guaranteed liabilities, annuities and other policies that are sensitive to future longevity, persistency and mortality rates. For example, if annuity policyholders live for longer than expected, then the Group will need to pay their benefits for longer.

The amount of additional capital required to meet additional liabilities could have a material adverse impact on the Group's ability to meet its cash flow targets.

 

The Group undertakes regular reviews of demographic experience and monitors exposure relative to quantitative risk appetite limits.

Monitoring includes identifying any trends or variances in experience, in order to appropriately reflect these in assumptions.

The Group continues to manage its longevity risk exposures, which includes the use of longevity swaps and reinsurance contracts to maintain this risk within appetite.

Where required, the Group continues to take capital management actions to mitigate adverse demographic experience.

 

Unchanged

This risk was assessed as 'Heightened' in the 2020 Annual Report and remains 'Heightened'. The assessment is driven by continued uncertainty around future demographic experience driven primarily by the long-term effects of COVID-19 on life expectancy; potential health risks from rising NHS waiting times; the rise in long-term sickness rates observed across the UK workforce; and health and customer behaviour implications from the cost-of-living crisis.

Demographic experience and the latest assessment of future trends continue to be considered in regular assumption reviews, including making appropriate allowance for the impacts of COVID-19 on both longevity and mortality as part of the 2023 assumption reviews.

The Group continues to monitor customer behaviour as a result of the cost-of-living crisis to ensure its impact on demographic assumptions is appropriately reflected in regular assumption reviews. Proactive action is being taken to ensure support is provided to customers as the impacts from the cost-of-living crisis continue to materialise.

The Group completed BPA transactions with a combined premium of c. £6bn in 2023. Furthermore, the launch of the new Standard Life Pension Annuity ('SLPA') product in the second half of 2023 is a significant milestone for the Group. Consistent with previous transactions, the Group continues to reinsure the vast majority of the longevity risk using longevity swaps and reinsurance contracts that are reviewed regularly.

 

Credit risk The Group is exposed to the risk of downgrade or failure of a significant counterparty    1 2 3

The Group seeks rewarded credit risk in order to drive value for shareholders and invests in a wide range of credit risky assets in accordance with its strategic asset allocation.

The Group is exposed to the risk of downgrades and deterioration in the creditworthiness or default of investments, derivatives or banking counterparties.

This could cause immediate financial loss or a reduction in future profits.

The Group is also exposed to trading counterparties, such as reinsurers or service providers, failing to meet all or part of their obligations. This would negatively impact the Group's operations that may in turn have adverse effects on customer relationships and may lead to financial loss.

The Group seeks to take credit risk by maintaining a high quality and diversified credit investment portfolio and ensuring relationships are with highly rated counterparties.

The Credit Risk Policy and Counterparty Limit Framework sets out a system of controls to manage this risk within appetite with early warning indicators to manage the most material exposures within acceptable tolerances. This includes the management of risks linked to climate change, including the impact on assets from transitioning to a low carbon economy.

The Group regularly monitors its counterparty exposures and has specific limits in place relating to individual counterparties (with sub-limits for each credit risk exposure), sector concentration, geographies and asset class. Limits also restrict exposure to BBB+ and below rated assets.

The Group undertakes regular stress and scenario testing of the credit portfolio. Where possible, exposures are diversified using a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised.

The Group regularly discusses market outlook with its asset managers in addition to the second line Risk oversight provided.

For mitigation of risks associated with stock-lending, additional protection is provided through collateral and indemnity insurance.

Unchanged

In the Group's 2020 Annual Report and Accounts, this risk was assessed as 'Heightened' as a result of the market volatility and wider economic and social impacts arising from COVID-19. While the residual risks from COVID-19 have receded, the current assessment of the level of exposure to this risk is unchanged from the 2020 position, driven by the ongoing geopolitical tensions, economic uncertainty and persistent high inflation.

Over 2023 the Group continued to undertake actions to increase the overall credit quality of its portfolio and mitigate the impact on risk capital of future downgrades. This positive progress is balanced by risks arising from geopolitical conflicts such as those in Ukraine and the Middle East, and supply chain disruptions arising from the risk of deterioration in the relationship between the USA and China. Uncertainties over the global economic outlook, persistent high inflation and higher for longer interest rates present an increased risk of defaults and downgrades. However, a UK sovereign downgrade is less probable than at the end of 2022, following both Moody's and S&P's revision of the UK credit rating's outlook from 'negative' to 'stable' during 2023. This has a positive impact on UK-related assets including Gilts, Housing Associations and Local Authority Loans.

Despite the failure of a number of US regional banks and a regulator-facilitated merger of Credit Suisse with UBS in early 2023, the Group's view is that a full-blown banking crisis will not follow. In addition, the Group has limited exposure to banks with idiosyncratic risks.

The Group has no direct shareholder credit exposure to Russia or Ukraine and no exposure to sanctioned entities.

The Group continues to increase investment in illiquid credit assets as a result of BPA transactions. This is within appetite and in line with the Group's strategic asset allocation plans. The growth in illiquid assets will be met by growth in the overall Group credit portfolio.

 

 

Emerging risks and opportunities

The Group's Senior Management and Board take emerging risks and opportunities into account when considering potential outcomes. This determines if appropriate management actions are in place to manage the risk or take advantage of the opportunity. Two examples of key risks and opportunities discussed by Senior Management and the Board during 2023 are:

Description

Risk Universe category

Quantum computing

Quantum computing has the potential to deliver improved actuarial analysis, portfolio optimisation, risk modelling and management, forecasting and enhanced fraud prevention. It has the ability to arrive at feasible solutions for optimisation problems, or find better accuracies for machine learning problems, or run simulations exponentially faster. However, there are significant risks to consider, such as the potential for quantum computing to be used with malicious intent against the Group. The Group will seek to get 'quantum-safe' as soon as possible, to minimise the magnitude of emerging threats, including the potential of breaking current encryption systems, which would leave personal data of the Group's customers vulnerable to hackers. Switching from one encryption regime to another will take years to implement with the payoff timeline for incorporating quantum resources currently perceived as being in excess of three years. It is crucial for the Group to develop quantum-resistant encryption algorithms and implement robust security measures to protect sensitive information. There is a potential opportunity to maximise capital preservation and commercial differentiation, by leveraging the exponential growth in data available to the market.

Operational

Pensions innovation


Changing customer expectations around simplicity of products, personalisation and increasing technology-based interaction presents greater risk from market disruptions. Customers are increasingly looking for frictionless services, which will heighten competition in offering a complete experience and solutions to customer needs. Aside from these risks, this does represent a significant opportunity for the Group to meet ever-evolving customer needs to become a trusted partner to and through retirement.

The Group continues to partner with innovative start-ups, providing user experience and technical delivery support for priority proposition initiatives. Digital and Workplace successfully launched Phoenix Group's Innovation Forum, inviting new partners from TCS COIN and FinTech Scotland networks to apply to work with the Group on defined challenges. The Group tracks industry change including on the use of analytics; ensuring compliance with cookies regulation; simplifying the process to gather permissions to market; and changes via Consumer Duty. The Group has an opportunity around future ways of working and innovation, leading to improved and enhanced customer experiences whilst ensuring that regulatory work fully supports good customer outcomes within the next one to three years.

Customer

 

 

Statement of Directors' responsibilities

 

Statement of Directors' responsibilities in respect of the Annual Report of Phoenix Group Holdings plc

The Directors are responsible for preparing the Annual Report, consolidated financial statements and the Company financial statements in accordance with applicable United Kingdom law and regulations.

 

The Board has prepared a Strategic report which provides an overview of the development and performance of Phoenix Group's business for the year ended 31 December 2023, covers the future developments in the business of Phoenix Group and its consolidated subsidiaries and provides details of any important events affecting the Company and its subsidiaries after the year end. The Strategic report and the Directors' report together constitute the management report as required under DTR 4.1.8R.

 

Company law requires the Directors to prepare the consolidated and the Company financial statements for each financial year. Under that law the Directors have elected to prepare the consolidated and Company financial statements in accordance with UK-adopted International Accounting Standards ('IASs') in conformity with the requirements of the Companies Act 2006. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of Phoenix Group and of the profit or loss of Phoenix Group and the Company for that period.

 

In preparing these financial statements the Directors are required to:

 

·      select suitable accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

·      make judgements and accounting estimates that are reasonable, relevant and reliable;

·      present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·      provide additional disclosures when compliance with the specific requirements in IASs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on Phoenix Group financial position and financial performance;

·      in respect of Phoenix Group financial statements, state whether UK-adopted IASs have been followed, subject to any material departures disclosed and explained in the financial statements;

·      in respect of the parent Company financial statements, state whether applicable UK accounting standards, have been followed, subject to any material departures disclosed and explained in the financial statements; and

·      prepare the consolidated and the Company financial statements on the Going concern basis unless it is inappropriate to presume that Phoenix Group will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain Phoenix Group's transactions and disclose with reasonable accuracy at any time the financial position of Phoenix Group, and enable them to ensure that the Company and the consolidated financial statements and the Directors' Remuneration report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of Phoenix Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic report, Directors' report, Directors' Remuneration report and Corporate governance statement that comply with that law and those regulations.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

The Directors as at the date of this Directors' report, whose names and functions are listed in the Board of Directors section on pages 64 to 67, confirm that, to the best of their knowledge:

 

·      the consolidated financial statements, prepared in accordance with UK-adopted IASs give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and undertakings included in the consolidation taken as a whole;

·      the Annual Report, including the Strategic report, includes a fair review of the development and performance of the business and the position of the Company and undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

·      the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for users (who have a reasonable knowledge of business and economic activities) to assess the Company's position, performance, business model and strategy.

 

The Strategic report and the Directors' report were approved by the Board of Directors on 20 March 2024.

 

By order of the Board

 

Andy Briggs

Group Chief Executive Officer

 

Rakesh Thakrar

Group Chief Financial Officer

 

21 March 2024

 

 

 

 

Consolidated income statement

For the year ended 31 December 2023



2023

2022

restated1


Notes

£m

£m





Insurance revenue

C1

4,861

5,142

Insurance service expenses

C5

(4,354)

(5,248)

Insurance service result before reinsurance contracts


507

(106)

Net expenses from reinsurance contracts


(180)

(162)

Insurance service result

C5

327

(268)





Fees and commissions

C2

967

858

Net investment income/(expense)

C3

20,840

(38,012)

Other operating income


86

102

Gain on acquisition

H2

66

-

Total income/(expense)


22,286

(37,320)





Net finance (expense)/income from insurance contracts

C4

(6,982)

22,879

Net finance income/(expense) from reinsurance contracts

C4

179

(1,053)

Net insurance finance (expense)/income


(6,803)

21,826





Change in investment contract liabilities


(13,894)

14,487

Change in reinsurers' share of investment contract liabilities


873

(1,448)

Amortisation and impairment of acquired in-force business

G2

(318)

(349)

Amortisation of other intangibles

G2

(6)

(6)

Administrative expenses

C5

(1,674)

(1,421)

Net (expense)/income attributable to unitholders


(186)

372

Profit/(loss) before finance costs and tax


278

(3,859)





Finance costs

C7

(258)

(230)

Profit/(loss) for the year before tax


20

(4,089)





Tax (charge)/credit attributable to policyholders' returns

C8

(184)

577

Loss before the tax attributable to owners


(164)

(3,512)





Tax (charge)/credit

C8

(108)

1,432

Add: tax attributable to policyholders' returns

C8

184

(577)

Tax credit attributable to owners

C8

76

855

Loss for the year attributable to owners


(88)

(2,657)





Attributable to:




Owners of the parent


(116)

(2,724)

Non-controlling interests

D5

28

67



(88)

(2,657)





Earnings per ordinary share




Basic (pence per share)

B3

(13.8)p

(274.9)p

Diluted (pence per share)

B3

(13.8)p

(274.9)p

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

Statement of comprehensive income

For the year ended 31 December 2023


Notes

2023

2022

restated1

Loss for the year


(88)

(2,657)





Other comprehensive (expense)/income:




Items that are or may be reclassified to profit or loss:








Cash flow hedges:




Fair value (losses)/gains arising during the year

D3

(107)

181

Reclassification adjustments for amounts recognised in profit or loss

D3

75

(186)

Exchange differences on translating foreign operations


4

32





Items that will not be reclassified to profit or loss:




Remeasurement of owner-occupied property

D3

2

(5)

Remeasurements of net defined benefit asset/liability

G1

(66)

940

Tax credit/(charge) relating to other comprehensive income items

C8

21

(283)

Total other comprehensive (expense)/income for the year


(71)

679





Total comprehensive expense for the year


(159)

(1,978)





Attributable to:




Owners of the parent


(187)

(2,045)

Non-controlling interests

D5

28

67



(159)

(1,978)

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

Statement of consolidated financial position

As at 31 December 2023


Notes

31 December 2023

£m

31 December 2022

restated1

£m

1 January 2022

restated1

£m

Assets










Pension scheme asset

G1

26

14

36

Reimbursement rights

G1

204

205

212






Intangible assets





Goodwill


10

10

10

Acquired in-force business


1,912

2,177

2,509

Brands


106

112

118


G2

2,028

2,299

2,637






Property, plant and equipment

G3

106

125

130






Investment property

G4

3,698

3,727

5,283






Financial assets





Loans and deposits


248

268

465

Derivatives

E3

2,766

4,068

4,567

Equities


87,628

76,737

86,981

Investment in associate

H4

349

329

431

Debt securities


93,374

83,116

104,761

Collective investment schemes


78,909

75,389

85,995

Reinsurers' share of investment contract liabilities


9,672

9,065

9,961


E1

272,946

248,972

293,161

Insurance assets





Insurance contract assets

F1

-

48

65

Reinsurance contract assets

F1

4,876

4,071

4,720



4,876

4,119

4,785






Deferred tax asset

G8

143

158

-

Current tax receivable

G8

502

519

419

Prepayments and accrued income


439

403

354

Other receivables

G5

2,578

4,455

1,693

Cash and cash equivalents

G6

7,168

8,839

9,112

Assets classified as held for sale

H3

4,594

7,205

9,946

Total assets


299,308

281,040

327,768

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

Approved by the Board on 21 March 2024.

 

 

 

Andy Briggs                                                                               Rakesh Thakrar

Chief Executive Officer                                                              Chief Financial Officer

Company registration number 11606773.

 


Notes

31 December 2023

£m

31 December 2022

restated1

£m

1 January 2022

restated1

£m

Equity and liabilities










Equity attributable to owners of the parent





Share capital

D1

100

100

100

Share premium


16

10

6

Shares held by employee benefit trust

D2

(15)

(13)

(12)

Foreign currency translation reserve


91

87

55

Merger relief reserve

D1

1,819

1,819

1,819

Other reserves

D3

16

46

56

Retained earnings


469

1,162

3,743

Total equity attributable to owners of the parent


2,496

3,211

5,767






Tier 1 Notes

D4

494

494

494

Non-controlling interests

D5

549

532

460

Total equity


3,539

4,237

6,721






Liabilities





Pension scheme liability

G1

2,557

2,520

3,103






Insurance liabilities





Insurance contract liabilities

F1

115,741

107,608

132,497

Reinsurance contract liabilities

F1

147

7

-



115,888

107,615

132,497

Financial liabilities





Investment contracts


158,004

141,169

157,449

Borrowings

E5

3,892

3,980

4,225

Derivatives

E3

3,342

5,875

1,248

Net asset value attributable to unitholders


2,921

3,042

3,592

Obligations for repayment of collateral received


1,005

1,706

3,442


E1

169,164

155,772

169,956






Provisions

G7

155

184

184

Deferred tax liabilities

G8

257

309

1,407

Current tax payable

G8

41

34

19

Lease liabilities

G9

74

92

99

Accruals and deferred income

G10

579

544

551

Other payables

G11

2,272

1,373

1,485

Liabilities classified as held for sale

H3

4,782

8,360

11,746

Total liabilities


295,769

276,803

321,047






Total equity and liabilities


299,308

281,040

327,768

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

Statement of consolidated changes in equity

For the year ended 31 December 2023


Share capital (note D1)

£m

Share premium (note D1)

£m

Shares held by the employee benefit trust (note D2)

£m

Foreign currency translation reserve

£m

Merger relief reserve (note D1)

£m

Other reserves (note D3)

£m

Retained earnings

£m

Total

£m

Tier 1 Notes (note D4)

£m

Non-controlling interests (note D5)

£m

Total equity

£m

At 1 January 20231

100

10

(13)

87

1,819

46

1,162

3,211

494

532

4,237













(Loss)/profit for the year

-

-

-

-

-

-

(116)

(116)

-

28

(88)

Other comprehensive income/(expense) for the year

-

-

-

4

-

(30)

(45)

(71)

-

-

(71)

Total comprehensive income/(expense) for the year

-

-

-

4

-

(30)

(161)

(187)

-

28

(159)













Issue of ordinary share capital, net of associated commissions and expenses

-

6

-

-

-

-

-

6

-

-

6

Dividends paid on ordinary shares

-

-

-

-

-

-

(520)

(520)

-

-

(520)

Dividends paid to non-controlling interests

-

-

-

-

-

-

-

-

-

(11)

(11)

Credit to equity for equity-settled share-based payments

-

-

-

-

-

-

22

22

-

-

22

Shares distributed by the employee benefit trust

-

-

12

-

-

-

(12)

-

-

-

-

Shares acquired by the employee benefit trust

-

-

(14)

-

-

-

-

(14)

-

-

(14)

Coupon paid on Tier 1 Notes, net of tax relief

-

-

-

-

-

-

(22)

(22)

-

-

(22)

At 31 December 2023

100

16

(15)

91

1,819

16

469

2,496

494

549

3,539

1  There has been no impact on equity from the transition to IFRS 9 Financial Instruments (see note A2.2 for further details).

Statement of consolidated changes in equity

For the year ended 31 December 2022


Share capital (note D1)

£m

Share premium (note D1)

£m

Shares held by employee benefit trust (note D2)

£m

Foreign currency translation reserve restated1

£m

Merger

relief

reserve

(note D1)

£m

Other reserves (note D3)

£m

Retained earnings restated1

£m

Total

£m

Tier 1 Notes (note D4)

£m

Non-controlling interests (note D5)

£m

Total equity restated1

£m

At 1 January 2022 (as reported)

100

6

(12)

71

1,819

56

3,775

5,815

494

460

6,769

Impact of transition to IFRS 17 (note A2.1)

-

-

-

(16)

-

-

(32)

(48)

-

-

(48)

At 1 January 2022 (restated)

100

6

(12)

55

1,819

56

3,743

5,767

494

460

6,721













(Loss)/profit for the year

-

-

-

-

-

-

(2,724)

(2,724)

-

67

(2,657)

Other comprehensive income/(expense) for
the year

-

-

-

32

-

(10)

657

679

-

-

679

Total comprehensive income/(expense) for the year

-

-

-

32

-

(10)

(2,067)

(2,045)

-

67

(1,978)













Issue of ordinary share capital, net of associated commissions and expenses

-

4

-

-

-

-

-

4

-

-

4

Dividends paid on ordinary shares

-

-

-

-

-

-

(496)

(496)

-

-

(496)

Dividends paid to non-controlling interests

-

-

-

-

-

-

-

-

-

(10)

(10)

Credit to equity for equity-settled share based payments

-

-

-

-

-

-

16

16

-

-

16

Shares distributed by employee benefit trust

-

-

12

-

-

-

(12)

-

-

-

-

Shares acquired by employee benefit trust

-

-

(13)

-

-

-

-

(13)

-

-

(13)

Non-controlling interests recognised on acquisition

-

-

-

-

-

-

-

-

-

15

15

Coupon paid on Tier 1 Notes, net of tax relief

-

-

-

-

-

-

(22)

(22)

-

-

(22)

At 31 December 2022

100

10

(13)

87

1,819

46

1,162

3,211

494

532

4,237

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

Statement of consolidated cash flows

For the year ended 31 December 2023


Notes

2023

£m

2022

£m

Cash flows from operating activities




Cash (utilised)/generated by operations

I2

(770)

1,019

Taxation paid


(93)

(153)

Net cash flows from operating activities


(863)

866





Cash flows from investing activities




Acquisition of SLF of Canada UK Limited, net of cash acquired

H2

(20)

-

Net cash flows from investing activities


(20)

-





Cash flows from financing activities




Proceeds from issuing ordinary shares, net of associated commission and expenses


6

4

Ordinary share dividends paid

B4

(520)

(496)

Dividends paid to non-controlling interests

D5

(11)

(10)

Repayment of policyholder borrowings

E5.2

(58)

(32)

Repayment of shareholder borrowings

E5.2

(350)

(450)

Repayment of lease liabilities

G9

(14)

(14)

Proceeds from new shareholder borrowings, net of associated expenses

E5.2

346

-

Proceeds from new policyholder borrowings, net of associated expenses

E5.2

64

61

Coupon paid on Tier 1 Notes


(29)

(29)

Interest paid on policyholder borrowings


(3)

(1)

Interest paid on shareholder borrowings


(200)

(215)

Net cash flows from financing activities


(769)

(1,182)





Net decrease in cash and cash equivalents


(1,652)

(316)

Cash and cash equivalents at the beginning of the year

(before reclassification of cash and cash equivalents to held for sale)


8,872

9,188

Less: cash and cash equivalents of operations classified as held for sale

H3

(52)

(33)

Cash and cash equivalents at the end of the year


7,168

8,839

 

Notes to the consolidated financial statements

A. Significant accounting policies

A1. Basis of preparation

The consolidated financial statements for the year ended 31 December 2023 set out on pages 164 to 290 comprise the financial statements of Phoenix Group Holdings plc ('the Company') and its subsidiaries (together referred to as 'the Group'), and were authorised by the Board of Directors for issue on 21 March 2024.

The consolidated financial statements have been prepared under the historical cost convention except for investment property, owner-occupied property and those financial assets and financial liabilities (including derivative instruments) that have been measured at fair value.

The consolidated financial statements are presented in sterling (£) rounded to the nearest million except where otherwise stated.

Assets and liabilities are offset and the net amount reported in the statement of consolidated financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the consolidated income statement unless required or permitted by an International Financial Reporting Standard ('IFRS') or interpretation, as specifically disclosed in the accounting policies of the Group.

Statement of compliance

The consolidated financial statements have been prepared in accordance with UK-adopted international accounting standards ('IASs') and the legal requirements of the Companies Act 2006.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiary undertakings, including collective investment schemes, where the Group exercises overall control. In accordance with the principles set out in IFRS 10 Consolidated Financial Statements, the Group controls an investee if and only if the Group has all the following:

•  power over the investee;

•  exposure, or rights, to variable returns from its involvement with the investee; and

•  the ability to use its power over the investee to affect its returns.

The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including relevant activities, substantive and protective rights, voting rights and purpose and design of an investee. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Further details about the consolidation of subsidiaries, including collective investment schemes, are included in note H1.

Going concern

The consolidated financial statements have been prepared on a going concern basis. The Directors have, at the time of approving the consolidated financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the period covered by the assessment having assessed the principal risks, forecasts, projections and other relevant evidence for the period to 31 March 2025. Further details of the going concern assessment are included in the Directors' Report on page 143.

A2. Adoption of new accounting pronouncements in 2023

In preparing the consolidated financial statements, the Group has adopted the following standards and amendments effective from 1 January 2023 and which have been endorsed by the UK Endorsement Board ('UKEB'):

•  IFRS 17 Insurance Contracts - see note A2.1;

•  IFRS 9 Financial Instruments - see note A2.2;

•  Disclosure of Accounting Policies (Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements). The amendments are intended to assist entities in deciding which accounting policies to disclose in their financial statements and requires an entity to disclose 'material accounting policy information' instead of its 'significant accounting policies'. Accounting policy information is material if, when considered together with other information included in an entity's financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements. The IASB has also developed guidance and examples to explain and demonstrate the application of the 'four-step materiality process' described in IFRS Practice Statement 2;

•  Definition of Accounting Estimates (Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors). The amendments replace the definition of a 'change in accounting estimates' with a definition of 'accounting estimates'. Under the new definition, accounting estimates are 'monetary amounts in financial statements that are subject to measurement uncertainty'. The Board has retained the concept of changes in accounting estimates in the standard by including a number of clarifications;

•  Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12 Income Taxes). The amendments narrow the scope of the recognition exemption in paragraphs 15 and 24 of IAS 12 so that it no longer applies to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. The IASB expects that the amendments will reduce diversity in reporting and align the accounting for deferred tax on such transactions with the general principle in IAS 12 of recognising deferred tax for temporary differences; and

•  International Tax Reform-Pillar Two Model Rules (Amendments to IAS 12 Income Taxes). The scope of IAS 12 has been amended to clarify that the standard applies to income taxes arising from tax law enacted or substantively enacted to implement the Pillar Two model rules published by the OECD, including tax law that implements qualified domestic minimum top-up taxes described in those rules. The amendments introduce a temporary exception to the accounting requirements for deferred taxes in IAS 12, so that an entity would neither recognise nor disclose information about deferred tax assets and liabilities related to Pillar Two income taxes. The Group confirms that it has applied this exception during the period.

The nature and impact of the adoption of IFRS 17 and IFRS 9 are disclosed in notes A2.1 and A2.2 below. The remaining amendments to standards are not considered to have a material effect on these consolidated financial statements.

A2.1 Adoption of IFRS 17 Insurance Contracts

The Group has adopted IFRS 17 effective from 1 January 2023 and comparative information for the year ended 31 December 2022 has been retrospectively restated. IFRS 17 replaces IFRS 4 Insurance Contracts and significantly changes the way the Group recognises, measures, presents and discloses its insurance contracts, investment contracts with discretionary participation features ('DPF') and reinsurance contracts held. It introduces a model that measures groups of contracts based on the present value of future cash flows with an explicit risk adjustment for non-financial risk and a contractual service margin ('CSM'), representing the unearned profit to be recognised in profit or loss over the coverage period.

New accounting policies adopted following the implementation of IFRS 17 are included within note F1 and critical accounting estimates and judgements applied are detailed in note A4.

A2.1.1 Transition approach

Changes in accounting policies resulting from the adoption of IFRS 17 have been applied using a fully retrospective approach ('FRA') to the extent practicable and using a Fair Value Approach ('FVA') approach where the FRA was considered impracticable. The FRA requires the Group to:

•  identify, recognise and measure each group of insurance and reinsurance contracts as if IFRS 17 had always applied;

•  derecognise any existing balances that would not exist had IFRS 17 always applied; and

•  recognise any resulting net difference in equity.

In determining whether it was practicable for the FRA transition method to be applied, the Group has considered the following key factors:

•  the ability to obtain assumptions and data at the required level of granularity, without the material use of hindsight, particularly in relation to contracts within acquired businesses and where the Group's financial reporting metrics did not require such information;

•  the availability and usability of historic data given the significant integration work performed by the Group on both its policy administration and actuarial modelling systems where re-platforming from legacy systems onto a unified platform has been carried out; and

•  the significant level of regulatory change experienced by the insurance industry, such as Solvency II, which impacts on the level of change undertaken on both legacy and current policy administration and actuarial modelling systems.

The FRA has been applied to the following insurance business on transition to IFRS 17:

•  bulk purchase annuities;

•  annuities and unit-linked policies that originated from 1 January 2021 onwards for the acquired Standard Life Assurance business entities;

•  SunLife policies that originated post 1 January 2018; and

•  ReAssure Assurance Limited annuities and non-profit policies from acquisition date of the ReAssure entities.

The FVA has been applied to the Group's remaining insurance business. On transition, 58% of the CSM (net of reinsurance) is calculated under the FRA and 42% under the FVA. However, of the business transitioned under FRA a significant amount of the CSM relates to the ReAssure business acquired in 2020 and fair valued at that date. Management therefore considers c.95% of the liabilities, equating to c.84% of the CSM, to be a more accurate reflection of the use of the FVA.

In applying the FVA, the CSM (or loss component) has been determined at 1 January 2022 as the difference between the fair value of a group of contracts and the present value of expected future cash flows including acquisition costs, plus an explicit risk adjustment. In determining the fair value, the Group has applied the requirements of IFRS 13 Fair Value Measurement, except for the demand deposit floor requirement, as required by IFRS 17. The fair value determined by the Group uses cash flows with contract boundaries consistent with IFRS 17 requirements. The measurement of the fair value of contracts includes items taken into consideration by a market participant but which are not included in the IFRS 17 measurement of contracts, such as a risk premium to reflect a market participant's view of uncertainty inherent in the contract cash flows being valued and a profit margin. Significant judgements and estimates used in determining the fair value have been set out in note A4.1.

The fair value for the groups of with-profits contracts, has been determined at transition date as the sum of the best estimate liability ('BEL'); the policyholders' share of the estate; a risk premium; and other fair value adjustments, i.e. profits on annuities vesting into the non-profit fund.

The treatment for reinsurance contracts held at transition is similar to that for insurance contracts with a few exceptions. The reinsurance BEL is calculated using the IFRS 17 discounted probability-weighted expected present value of the cash flows on transition date. The cash flows under the reinsurance contract are stressed in order to calculate the risk premium, plus an adjustment is made for risk of reinsurer default (i.e. additional risk of claims received being lower than the best estimate) in the risk premium.

A2.1.2 Impact of transition

Total equity attributable to owners of the parent

The Group has determined the quantitative impact of moving to IFRS 17 on 1 January 2022 to be a decrease in the total equity attributable to owners of the parent of £48 million, from £5,815 million to £5,767 million. The main drivers of this reduction are:



£m

Derecognition of intangible assets related to contracts measured under IFRS 17

On adoption of IFRS 17, the acquired in force business ('AVIF') and customer relationship intangibles and deferred acquisition cost assets associated with the acquisition of insurance contracts are no longer held as separate assets and instead are included implicitly in the measurement of insurance contract assets and liabilities.

(2,030)

Remeasurement of insurance contract liabilities (net of reinsurance)

The remeasurement of insurance contract liabilities primarily includes the following items:

•  removal of IFRS 4 margins as IFRS 17 requires cash flows to be measured on a best estimate basis with the addition of an explicit adjustment for risk;

•  inclusion of future shareholder profits from with-profit and unit-linked business that are not fully recognised under IFRS 4; and

•  changes in the discount rate, most materially impacting annuity contracts.

Also included is the impact of a change in treatment in respect of hybrid contracts. These are typically contracts which contain elements of unit-linked and with-profits. Under IFRS 4 these components were separated and reported under IAS 39 and IFRS 4 respectively. Under IFRS 17 if the contract as a whole meets the definition of an investment with DPF contract, the whole contract falls within the scope of IFRS 17 unless the criteria for a distinct investment component is met. If it does not, the whole contract falls within the scope of IFRS 9. On transition a significant proportion of the Group's hybrid contracts were determined to fall within the scope of IFRS 17 and did not meet the criteria to be separated into its components. A small portion of hybrid contracts are accounted for under IFRS 9.

5,481

Recognition of a risk adjustment (net of reinsurance)

IFRS 17 requires an explicit adjustment in respect of non-financial risk, this replaces some of the margins for uncertainty implicitly included in the measurement of cash flows under IFRS 4.

(1,061)

Recognition of a
contractual service margin

(net of reinsurance)

The contractual service margin reflects the unearned profit to be recognised in profit or loss as services are provided.

(2,430)

Changes in deferred tax from the above items


(8)

Change in total equity attributable to owners of the parent


(48)

In addition to the above IFRS 17 has impacted how insurance and reinsurance contract-related balances are presented in the statement of consolidated financial position. Certain assets and liabilities previously reported separately are now included within IFRS 17 balances, these include balances such as unallocated surplus, deposits received from reinsurers and insurance contract/reinsurance payables/receivables and payables related to direct insurance contracts. Other liabilities and assets have been partly reclassified within IFRS 17 liabilities and assets where these balances relate to insurance contracts, such as provisions, loans and deposits (policy loans), other payables and other receivables. Costs that are assessed as directly attributable to insurance contracts are accounted for under IFRS 17 and this includes those that would have previously determined in accordance with the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets to be included in provisions.

The impacts on the key line items in the Group's statement of consolidated financial position are set out below:


31 December 2021 as previously reported £m

Impact of implementation of IFRS 17 £m

1 January 2022 restated £m

Intangible assets

4,565

(1,928)

2,637

Financial assets

293,192

(31)

293,161

Insurance contract assets

-

65

65

Reinsurance contract assets

8,587

(3,867)

4,720

Other insurance/reinsurance receivables

139

(139)

-

Other assets

27,316

(131)

27,185

Total assets

333,799

(6,031)

327,768





Insurance contract liabilities

128,864

3,633

132,497

Unallocated surplus

1,801

(1,801)

-

Financial liabilities




Investment contracts

160,417

(2,968)

157,449

Deposits received from reinsurers

3,569

(3,569)

-

Provisions

235

(51)

184

Deferred tax liabilities

1,399

8

1,407

Other insurance/reinsurance payables

2,007

(2,007)

-

Other liabilities

28,738

772

29,510

Total liabilities

327,030

(5,983)

321,047

Total equity

6,769

(48)

6,721

Loss attributable to owners for the year ended 31 December 2022

As a result of adopting IFRS 17, the loss after tax attributable to owners for the year ended 31 December 2022 increased by £895 million from a loss of £1,762 million to a loss of £2,657 million.


As previously

reported

£m

Restated

£m

Change

£m

Adjusted operating profit before tax

1,245

544

(701)

Economic variances

(2,673)

(3,309)

(636)

Amortisation and impairment of acquired in-force business

(501)

(347)

154

Amortisation and impairment of other intangibles

(21)

(6)

15

Other non-operating items

(179)

(262)

(83)

Finance costs attributable to owners

(199)

(199)

-

Loss before tax attributable to owners of the parent

(2,328)

(3,579)

(1,251)

Profit before tax attributable to non-controlling interest

67

67

-

Loss before tax attributable to owners

(2,261)

(3,512)

(1,251)

Tax credit attributable to owners

499

855

356

Loss after tax attributable to owners

(1,762)

(2,657)

(895)

Details of the adjusted operating profit methodology following the transition to IFRS 17 is set out in note B1.

The main drivers of this reduction are:

•  the change in profit recognition pattern. Under IFRS 17 profits are spread over the life of contracts as service is provided. This includes the deferral of new business profits from annuity contracts written in the period;

•  economic variances have increased in relation to the Solvency II hedging in place. The interest rate sensitive liabilities reduce compared to IFRS 4 as the majority of the Group's CSM uses locked-in discount rates resulting in a higher level of 'over-hedging'. In addition, the offset to the losses primarily from interest rate hedging from gains arising on equity hedges in the previously reported numbers is reduced, as under IFRS 17 these hedges now partially offset adverse market impacts arising in the income statement from unit-linked and with-profits business which have a loss component;

•  a reduction in amortisation of the element of acquired in-force ('AVIF') business associated with insurance contracts which is derecognised on transition to IFRS 17; and

•  other non-operating items have reduced due to costs that have been assessed as directly attributable to insurance contracts being included in the calculation of the CSM.

A2.2 Adoption of IFRS 9 Financial Instruments

IFRS 9 replaced IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018. The Group elected, under the amendments to IFRS 4, to apply the temporary exemption from IFRS 9, to defer the initial application date of IFRS 9 to align with the initial application of IFRS 17. The Group has therefore adopted the requirements of IFRS 9 from 1 January 2023 and in accordance with the transition provisions in the standard, comparatives have not been restated.

IFRS 9 introduces new requirements for classifying and measuring financial assets and liabilities, impairment methodology, and general hedge accounting rules and replaced the corresponding sections of IAS 39.

New accounting policies adopted following the implementation of IFRS 9 are included within note E1.

A2.2.1 Classification and measurement of financial instruments

Financial assets

IFRS 9 requires all financial assets to be assessed based on a combination of the Group's business model for managing the assets and the instruments' contractual cash flow characteristics. As a result of adopting IFRS 9 on 1 January 2023, certain loans and deposits and cash and cash equivalents investment asset balances, previously classified as amortised cost, have now been reclassified at fair value through profit or loss ('FVTPL') (mandatory) category. The classification adopted is driven by the business model assessment which determined that these assets are managed and evaluated on a fair value basis. These financial assets, which back policyholder liabilities, are actively managed and therefore support the wider objective of the Group to maximise Solvency II headroom. The reclassification of these assets has not resulted in an adjustment to equity at 1 January 2023 as the fair value of these assets at this date was equal to the amortised cost.

Under IAS 39, certain underlying items of participating contracts were designated as at FVTPL because the Group managed them and evaluated their performance on a fair value basis in accordance with a documented investment strategy. Under IFRS 9, portfolios of these assets are mandatorily measured at FVTPL as the business model assessment concludes that they are managed and evaluated on a fair value basis and consequently the classification as FVTPL remains unchanged upon adoption of IFRS 9.

All other financial assets that are not actively managed such as certain cash and cash equivalents, receivables and loans and deposits, are typically held to collect cash flows and therefore continue to be classified as amortised cost under IFRS 9.

The Group has not elected to measure any equity securities financial assets at fair value through other comprehensive income ('FVOCI'). Further, no other debt securities financial assets are classified as FVOCI on adoption of IFRS 9.

Financial liabilities

IFRS 9 has not had a significant effect on the Group's accounting policies for financial liabilities as the classification and measurement of financial liabilities remains largely unchanged from IAS 39. Financial liabilities are either classified as amortised cost or at FVTPL.

Investment contracts without DPF, which do not transfer significant insurance risk, continue to be accounted for as a financial liability and designated at FVTPL on the basis that these liabilities are both managed on a fair value basis and are designated as such to avoid an accounting mismatch with the assets held to back them.

On transition to IFRS 17 and IFRS 9, deposits from reinsurers are no longer classified as financial liabilities under IFRS 9 in accordance with the IFRS 17 requirements for 'premium withheld' arrangements. The premiums withheld have now become a component of fulfilment cash flows and for contracts with deposit back arrangements, the presentation of the deposit back liability has now changed to be shown as an offset to the reinsurance asset.

The Group has assessed the IFRS 9 requirement that changes in fair value of financial liabilities relating to credit risk be presented in OCI, with the balance of the change in fair value to be presented in profit and loss, unless this treatment would create or enlarge an accounting mismatch in profit and loss. Based on this assessment, no financial liabilities were identified as requiring split presentation of movements between OCI and profit and loss as this would create an accounting mismatch as the assets held to back these liabilities are at FVTPL.

The valuation of investment contract liabilities without DPF are measured at the fair value of the related assets and liabilities. The liability is the sum of the investment contract liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges.

The application of the classification and measurement requirements in IFRS 9 at 1 January 2023 resulted in the following reclassification adjustments:


IAS 39

IFRS 9

Financial assets

Measurement category

Carrying amount

£m

Measurement category

Carrying amount

£m

Loans and deposits1

Amortised cost

254

FVTPL

254

Cash and cash equivalent1

Amortised cost

8,423

FVTPL

8,423

1  Actively managed investment assets.

A2.2.2 Impairment

The adoption of IFRS 9 has changed the Group's accounting for impairment losses for financial assets held at amortised cost by replacing IAS 39's incurred loss approach with a forward-looking expected credit loss ('ECL') approach. The new impairment model applies to the Group's financial assets carried at amortised cost.

A significant portion of Group's financial assets are carried at FVTPL under IFRS 9 and are therefore not subject to ECL assessment. The other financial assets classified as amortised cost and subject to ECL mainly relate to certain loan assets, other receivables and certain cash and cash equivalents balances.

In accordance with IFRS 9, the Group has applied the ECL model to financial assets measured at amortised cost. For these in-scope financial assets at the reporting date either the lifetime expected credit loss or a 12-month expected credit loss is provided for, depending on the Group's assessment of whether the credit risk associated with the specific asset has increased significantly since initial recognition. The Group's current credit risk grading framework comprises the following categories:

Category

Description

Basis for recognising ECL

Performing

The counterparty has a low risk of default and does not have any past-due amounts

12 month ECL

Doubtful

There has been a significant increase in credit risk since initial recognition

Lifetime ECL - not credit impaired

In default

There is evidence indicating the asset is credit impaired

Lifetime ECL - credit impaired

Write-off

There is evidence indicating that the counterparty is in severe financial difficulty and the Group has no realistic prospect of recovery

Amount is written off

The financial assets held at amortised cost are assessed at transition as 'performing' and this assessment is summarised below.

Loans and deposits - the Group has assessed the estimated credit losses of these loans and deposits as low due to the external credit ratings of the counterparties resulting in low credit risk and there being no past-due amounts.

Other receivables - these balances relate to investment broker balances and other regular receivables due to the Group in the normal course of business. Expected credit losses are assessed as being immaterial given the typically short-term nature of these balances.

Cash and cash equivalents - the Group's cash and cash equivalents are held with banks and financial institutions, which have investment grade credit ratings of "BBB" or above. The Group considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties and no history of default. The impact to the net carrying amount stated in the table above is therefore considered not to be material.

Based on the above assessment, an immaterial credit loss balance has been determined due to these financial assets being predominantly short-term and having low credit risk.

A2.2.3 Hedge accounting

The Group has applied IFRS 9's hedge accounting requirements. The Group uses cross currency swaps to hedge the currency risk arising from borrowings denominated in foreign currencies. The Group has carried over the current hedging relationships as cash flow hedges under IFRS 9. The IFRS 9 hedge accounting model requires the extended documentation of each hedging relationship. The Group has updated the existing hedging documentation to reflect the changes to the effectiveness testing process to include qualitative testing on a prospective basis including the analysis of the economic relationship between the hedged item and hedging instrument, analysis of source of hedge ineffectiveness, determining the hedge ratio and assessment of whether the effect of credit risk dominates the value changes that result from the economic relationship. The current hedging relationships are straightforward arrangements whereby the cross currency swaps fully hedge the underlying hedged item and they are all fully collateralised.

A3. Accounting policies

The principal accounting policies have been consistently applied in these consolidated financial statements. An exception to this is where IFRS 9 has been adopted prospectively from 1 January 2023 and IAS 39 has been applied in the comparative period. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note, with a view to enabling greater understanding of the results and financial position of the Group. All other significant accounting policies are disclosed below.

A3.1 Foreign currency transactions

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The consolidated financial statements are presented in sterling, which is the Group's presentation currency.

The results and financial position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

•  assets and liabilities are translated at the closing rate at the period end;

•  income, expenses and cash flows denominated in foreign currencies are translated at average exchange rates; and

•  all resulting exchange differences are recognised through the statement of consolidated comprehensive income.

Foreign currency transactions are translated into the functional currency of the transacting Group entity using exchange rates prevailing at the date of the translation. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. Translation differences on non-monetary items at fair value through profit or loss are reported as part of the fair value gain or loss.

A3.2 Other operating income

Other operating income includes income from all other operating activities which are incidental to the principal activities of the Group.

A4. Critical accounting estimates and judgements

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Disclosures of judgements made by management in applying the Group's accounting policies include those that have the most significant effect on the amounts that are recognised in the consolidated financial statements. Disclosures of estimates and associated assumptions include those that have a significant risk of resulting in a material change to the carrying value of assets and liabilities within the next year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements as to the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Group's business that typically require such estimates are the measurement of insurance and investment contract liabilities with DPF, determination of the fair value of certain financial assets and liabilities, and valuation of pension scheme assets and liabilities.

The application of critical accounting judgements that could have the most significant effect on the recognised amounts include classification of contracts to be accounted for as insurance or investment contracts, the determination of adjusted operating profit, the recognition of an investment as an associate and determination of control with regard to underlying entities.

Details of all critical accounting estimates and judgements are included below.

A4.1 Insurance contract and investment contract with DPF liabilities

The Group applies significant judgement and estimation when classifying and measuring insurance contracts, including determination of the inputs, assumptions and techniques it uses to determine the BEL, risk adjustment and CSM at each reporting period to measure the insurance contract and reinsurance contact liabilities/assets. The main areas where significant judgement and estimation were required are:

Contract classification

Classification of contracts as insurance (or reinsurance) is based upon an assessment of the significance of insurance risk transferred to the Group. Insurance contracts are defined by IFRS 17 as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract.

Classification of contracts as investment with DPF is based upon an assessment of whether the discretionary amount of benefits is expected to be a significant amount of the total benefits.

Measurement of insurance contract liabilities

In applying IFRS 17 requirements for the measurement of insurance contract liabilities, the following inputs and methods were used that include significant estimates:

•  the present value of future cash flows is estimated using deterministic scenarios, except where stochastic modelling involves projecting future cash flows under a large number of possible economic scenarios for market variables such as interest rates and equity returns and where the cash flows reflect a series of interrelated options that are implicit or explicit;

•  the approach and assumptions used to derive discount rates, including any illiquid premiums (see note F11.2.1);

•  the approach and confidence level for estimating risk adjustments for non-financial risk (see note F11.2.2); and

•  the assumptions about future cash flows relating to mortality, morbidity, policyholder behaviour, and expense inflation (see note F11.2.3).

Details of how insurance contract liabilities are accounted for are included within the accounting policies in note F1.

Amortisation of the CSM

The Group applies judgements when determining the amount of the CSM for a group of insurance contracts to be recognised in profit or loss as insurance revenue in each period to reflect the insurance contract services provided in that period. The amount is determined by considering for each group of contracts the quantity of the benefits provided and its expected coverage period. Determining the coverage unit requires significant judgement, taking into consideration a number of areas, including:

•  identification of a coverage unit that is deemed to be a suitable proxy for the service provided. This is particularly relevant for products that provide a combination of different types of insurance coverage, investment-related service and investment-return service; and

•  the allowance for time value of money in the release of the coverage unit (i.e. whether or not the coverage units should be discounted).

For deferred annuities the weighting between the deferral phase and the payment phase coverage units is calculated so that the services provided in the deferral phase reflect the investment return and those in the payment phase reflect the annuity payment with the total services adjusted to provide a consistent level of service when transitioning between the deferral phase and the payment phase.

Following an assessment, the Group has determined the quantity of the benefits provided under each contract to be a suitable proxy for the service provided as follows:

Type of business/products

Coverage unit (quantity of benefits)

Term life assurance

Endowment

Non-participating whole-life

Other protection products

Sum assured in force

Immediate annuity

Annuity payments

Deferred annuity

Fund size during deferred period and annuity payments for the payment period

Unit linked

Annual management charge and insurance charges

Conventional with-profits ('CWP') & Unitised with-profits ('UWP')

Maximum of the guaranteed benefit and asset share

In relation to the application of discount rate in determining the coverage units, the Group has elected to apply discounting as this gives a more even allocation of profit as services are provided over the life of a group of contracts. The discount rate is the locked-in rate for insurance contracts measured under the general model ('GM') and current rates for insurance contracts measured under the variable fee approach ('VFA').

In addition, the sections noted below are areas where significant judgement and estimation has been required on transition to IFRS 17.

Determination of transition method and its application

The Group exercised significant judgement in determining which transition method was applied for each group of insurance contracts, considering the impracticability assessment for the application of the FRA, including determining whether sufficient reasonable and supportable information was available to apply the FRA. Where it was assessed that a FRA was impracticable, the Group determined, in line with the options available in IFRS 17, to use the FVA.

In applying the FVA, the Group has used reasonable and supportable information at the transition date in order to identify groups of insurance contracts and to determine whether any contracts are considered to be direct participating contracts, which meet the VFA eligibility criteria. For groups of contracts measured using the FVA, the Group has aggregated contracts issued more than one year apart.

In estimating the fair value, the Group has used significant judgement to determine adjustments required to reflect a market participant's view, and also to allocate fair value between groups of insurance contracts as follows:

•  only relevant future cash flows within the boundaries of the insurance contracts were included in the fair value estimation;

•  assumptions about BEL were adjusted and simplified by applying IFRS 17 parameters i.e. discount rate, expenses, contract boundary plus incorporating the risk premium to reflect the view of a market participant;

•  discount rates were determined at the transition date, based on the risk-free rate with an allowance for illiquid premium taken into account;

•  the risk premium was calibrated to a market participant view of an appropriate cost of capital rate; and

•  a proportional approach was used to allocate the risk premium to each group of insurance contracts.

Eligibility assessment for use of VFA

The Group has issued unit-linked and with-profits contracts, which fall within the scope of IFRS 17, where the return on the underlying items is shared with policyholders. Underlying items comprise mainly specified portfolios of investment assets for unit-linked contracts and the net assets of a with-profits fund for with-profits policies that determine amounts payable to policyholders. The Group has exercised significant judgement to assess whether the amounts expected to be paid to the policyholder constitute a substantial share of the fair value returns on the underlying items. The policyholder's share of the fair value returns on underlying items includes amounts deducted to cover non-investment services, e.g. administration and risk charges. The fair value returns assumed on the underlying items also reflect the expected real world returns over the duration of the contract or group of insurance contracts being tested.

Determination of contract boundaries

The assessment of the contract boundary defines which future cash flows are included in the measurement of a contract. This requires judgement and consideration of the Group's substantive rights and obligations under the contract. The Group exercises significant judgement in determining the appropriate contract boundaries, taking into consideration a number of factors, including: features and terms and conditions of products; any implied substantive obligations and rights arising from the features of the product or policyholder needs it is meeting; pricing practices; and administrative practices.

Cash flows are within the boundaries of investment contracts with DPF if they result from a substantive obligation of the Group to deliver cash at a present or future date.

Separating distinct investment components from insurance and reinsurance contracts

When assessing whether an investment component is distinct, the Group considers the following, which may indicate that the insurance and investment component are highly interrelated:

•  the value of one component varies with the other component;

•  existence of an option to switch between the different components;

•  discounts that span both elements e.g. reduced asset management charges based on total size of contract; and

•  other interacting features, e.g. insurance risk from premium waivers, return of premium covering both elements of the policy.

Where the investment component is non-distinct, the whole contract is measured under IFRS 17. Distinct investment components are separated from the host insurance contract and measured under IFRS 9.

A4.2 Fair value of financial assets and liabilities

Financial assets and liabilities are measured at fair value and accounted for as set out in the accounting policies in note E1. Financial instruments valued where valuation techniques are based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued where valuation techniques are based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates.

Further details of the estimates made are included in note E2. In relation to the Level 3 financial instruments, sensitivity analysis is performed in respect of the key assumptions used in the valuation of these financial instruments. The details of this sensitivity analysis are included in note E2.4.

A4.3 Pension scheme obligations

The valuation of pension scheme obligations is determined using actuarial valuations that depend upon a number of assumptions, including discount rate, inflation and longevity. External actuarial advice is taken with regard to setting the financial assumptions to be used in the valuation. As defined benefit pension schemes are long-term in nature, such assumptions can be subject to significant uncertainty.

Further details of these estimates and the sensitivity of the defined benefit obligation to key assumptions are provided in note G1.

A4.4 Adjusted operating profit

Adjusted operating profit is the Group's non-GAAP measure of performance and provides stakeholders with a comparable measure of the underlying performance of the Group. The Group is required to make judgements as to the appropriate longer-term rates of investment return for the determination of adjusted operating profit based on yields at the start of the financial year, as detailed in note B2, and as to whether items are included within adjusted operating profit or excluded as an adjustment to adjusted operating profit in accordance with the accounting policy detailed in note B1. Items excluded from adjusted operating profit are referred to as 'non-operating items'.

A4.5 Control and consolidation

The Group has invested in a number of collective investment schemes and other types of investment where judgement is applied in determining whether the Group controls the activities of these entities. These entities are typically structured in such a way that owning the majority of the voting rights is not the conclusive factor in the determination of control in line with the requirements of IFRS 10 Consolidated Financial Statements. The control assessment therefore involves a number of further considerations such as whether the Group has a unilateral power of veto in general meetings and whether the existence of other agreements restrict the Group from being able to influence the activities. Further details of these judgements are given in note H1.

A4.6 How climate risk affects our accounting judgments and estimates

In preparation of these financial statements, the Group has considered the impact of climate change across a number of areas, predominantly in respect of the valuation of financial instruments, insurance and investment contract liabilities and goodwill and other intangible assets.

Many of the effects arising from climate change will be longer-term in nature, with an inherent level of uncertainty, and have been assessed as having a limited effect on accounting judgments and estimates for the current period.

The majority of the Group's financial assets are held at fair value and use quoted market prices or observable market inputs in their valuation. The use of quoted market prices and market inputs to determine fair value reflects current information and market sentiment regarding the effect of climate risk. For the valuation of level 3 financial instruments, there are no material unobservable inputs in relation to climate risk. Note E6 provides further risk management disclosures in relation to financial risks including sensitivities in relation to credit and market risk. In addition, further details on managing the related climate change risks are provided in the Task Force for Climate-related Financial Disclosures ('TCFD') on page 44 of the Annual Report and Accounts.

Insurance and investment contract liabilities with DPF use economic assumptions taking into account market conditions at the valuation date as well as non-economic assumptions such as future expenses, longevity and mortality, which are set based on past experience, market practice, regulations and expectations about future trends. Due to the level of annuities written by the Group, it is particularly exposed to longevity risk. At 31 December 2023 there are no adjustments made to the longevity assumptions to specifically allow for the impact of climate change on annuitant mortality. Further details as to how assumptions are set and of the sensitivity of the Group's results to annuitant longevity and other key insurance risks are set out in note F11.

The assessment of impairment for goodwill and intangible assets is based on value in use calculations. Value in use represents the value of future cash flows and uses the Group's three-year annual operating plan and the expectation of long-term economic growth beyond this period. The three-year annual operating plan reflects management's current expectations on competitiveness and profitability and reflects the expected impacts of the process of moving towards a low carbon economy. Note G2 provides further details on goodwill and other intangible assets and on impairment testing performed.

A5. New accounting pronouncements not yet effective

The IASB has issued the following standards or amended standards and interpretations which apply from the dates shown. The Group has decided not to early adopt any of these standards, amendments or interpretations where this is permitted.

Classification of Liabilities as Current and Non-current Liabilities with Covenants (Amendments to IAS 1 Presentation of Financial Statements) (1 January 2024)

The initial amendments clarify rather than change existing requirements and aim to assist entities in determining whether debt and other liabilities with an uncertain settlement date should be classed as current or non-current. It is currently not expected that there will be any reclassifications as a result of this clarification.

Non-current Liabilities with Covenants (Amendments to IAS 1 Presentation of Financial Statements) (1 January 2024)

Further amendments were then made which specify that covenants of loan arrangements which an entity must comply with only after the reporting date would not affect classification of a liability as current or non-current at the reporting date. However, those covenants that an entity is required to comply with on or before the reporting date would affect classification as current or non-current, even if the covenant is only assessed after the entity's reporting date. The amendments also introduce additional disclosure requirements. When an entity classifies a liability arising from a loan arrangement as non-current and that liability is subject to the covenants which an entity is required to comply with within 12 months of the reporting date, the entity shall disclose information in the notes that enables users of financial statements to understand the risk that the liability could become repayable within 12 months of the reporting period. These amendments are not expected to have any impact on the Group.

Lease Liability in a Sale and Leaseback (Amendments to IFRS 16 Leases) (1 January 2024)

The amendments relate to how a seller-lessee accounts for variable lease payments that arise in a sale and leaseback transaction. On initial recognition, the seller-lessee is required to include variable lease payments when measuring a lease liability arising from a sale-and-leaseback transaction. After initial recognition, they are required to apply the general requirements for subsequent accounting of the lease liability such that no gain or loss relating to the retained right of use is recognised. Seller-lessees are required to reassess and potentially restate sale-and-leaseback transactions entered into since the implementation. These amendments are not expected to have any impact on the Group.

Supplier Finance Arrangements (Amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures) (1 January 2024)

The amendments add a disclosure objective to IAS 7 stating that an entity is required to disclose information about its supplier finance arrangements that enables users of financial statements to assess the effects of those arrangements on the entity's liabilities and cash flows. In addition, IFRS 7 was amended to add supplier finance arrangements as an example within the requirements to disclose information about an entity's exposure to concentration of liquidity risk These amendments are not expected to have any impact on the Group.

Lack of Exchangeability (Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates) (1 January 2025)

The amendments clarify how an entity should assess whether a currency is exchangeable and how it should determine a spot exchange rate when exchangeability is lacking, as well as require the disclosure of information that enables users of financial statements to understand the impact of a currency not being exchangeable. These amendments are not expected to have any impact on the Group.

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) (Effective date deferred)

The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. These amendments are not expected to have any impact on the Group.

The following amendments to standards listed above have been endorsed for use in the UK by the UK Endorsement Board:

•  Classification of Liabilities as Current and Non-current (Amendments to IAS 1);

•  Non-current Liabilities with Covenants (Amendments to IAS 1);

•  Lease Liability in a Sale and Leaseback (Amendments to IFRS 16 Leases); and

•  Supplier Finance Arrangements (Amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures).

B. Earnings performance

B1. Segmental analysis

The Group defines and presents operating segments in accordance with IFRS 8 'Operating Segments' which requires such segments to be based on the information which is provided to the Board, and therefore segmental information in this note is presented on a different basis from profit or loss in the consolidated financial statements.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Group.

For management purposes the Group is organised into value centres. During the period the Group reassessed its reportable segments to reflect its transition to a purpose-led retirement specialist and the commencement of the grow, optimise and enhance stage of our strategic journey. The Group now has five operating segments comprising Retirement Solutions, Pensions & Savings, With-Profits, SunLife & Protection, and Europe & Other. The comparative information has been restated to reflect this change. For reporting purposes, operating segments are aggregated where they share similar economic characteristics including the nature of products and services, types of customers and the nature of the regulatory environment. The SunLife & Protection operating segment has been aggregated with the Europe operating segment into the Europe & Other reportable segment.

The Retirement Solutions segment includes new and in-force individual annuity and Bulk Purchase Annuity contracts written within shareholder funds, with the exception of individual annuity contracts written as a result of Guaranteed Annuity Options on with-profit contracts. Such contracts remain in the With-Profits segment following the transition to IFRS 17, as they fall within the contract boundary of the original savings or pension contract. The Retirement Solutions segment also includes UK individual annuity business written within the Standard Life Heritage With-Profit Fund as the profits are primarily attributable to the shareholder through the Recourse Cash Flow mechanism established on demutualisation.

The Pensions & Savings segment includes new and in-force life insurance and investment unit-linked policies in respect of pensions and savings products that the Group continues to actively market to new and existing policyholders. This includes products such as workplace pensions and Self-Invested Personal Pension ('SIPPs') distributed through the Group's Strategic Partnership with abrdn plc. In addition, it includes in-force insurance and investment unit-linked products from legacy businesses which no longer actively sell products to policyholders and which therefore run-off gradually over time. The Pensions & Savings segment also includes UK unitised business written in the Standard Life Heritage With-Profit funds, as profits are primarily attributable to the shareholder through the Recourse Cash Flow mechanism.

The With-Profits segment includes all policies written by the Group's with-profit funds, with the exception of Standard Life Heritage With-Profit Fund contracts reflected in other segments as noted above for Retirement Solutions and Pensions & Savings where profits are primarily attributable to the shareholder through the Recourse Cash Flow mechanism.

The Europe & Other segment includes business written in Ireland and Germany. This includes products that are actively being marketed to new policyholders and legacy in-force products that are no longer being sold to new customers. The segment also includes protection products and products sold under the SunLife brand.

The Corporate Centre segment, which is not a reportable segment, principally comprises central head office costs that are not directly attributable to the Group's insurance or investment contracts. Management services costs are now allocated to the four reportable segments.

Inter-segment transactions are set on an arm's length basis in a manner similar to transactions with third parties. Segmental results include those transfers between business segments which are then eliminated on consolidation.

Segmental measure of performance: Adjusted operating profit

The Group uses a non-GAAP measure of performance, being adjusted operating profit, to evaluate segmental performance. Adjusted operating profit is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items.

The Group's adjusted operating profit methodology has been updated since it was disclosed in the 2022 consolidated financial statements following the transition to IFRS 17 Insurance Contracts.

The following sets out the adjusted operating profit methodology:

For unit-linked business accounted for under IFRS 9, adjusted operating profit reflects the fees collected from customers less operating expenses including overheads.

For unit-linked and With-Profits business accounted for under IFRS 17, adjusted operating profit reflects the release of the risk adjustment, amortisation of CSM, and demographic experience variances in the period.

For shareholder annuity, other non-profit business and With-Profits funds receiving shareholder support accounted for under IFRS 17, adjusted operating profit includes the release of the risk adjustment, amortisation of CSM, and demographic experience variances in the period. Adjusted operating profit also incorporates an expected return on the financial investments backing this business and any surplus assets, with allowance for the corresponding movement in liabilities.

Adjusted operating profit excludes the above items for non-profit business written in a With-Profits fund where these amounts do not accrue directly to the shareholder.

Adjusted operating profit includes the effect of experience variances relating to the current period for non-economic items, such as mortality and expenses. It also incorporates the impacts of asset trading and portfolio rebalancing where not reflected in the discount rate used in calculating expected return.

Adjusted operating profit is reported net of policyholder finance charges and policyholder tax.

Adjusted operating profit excludes the impacts of the following items:

Economic variances

•  the difference between actual and expected experience for economic items recognised in the income statement, impacts of economic assumptions on the valuation of liabilities measured under the General Model and the change in value of loss components on Variable Fee Approach business resulting from market movements on underlying items;

•  economic volatility arising from the Group's hedging strategy which is calibrated to protect the Solvency II capital position and cash generation capability of the operating companies;

•  the accounting mismatch resulting from the application of IFRS 17 between the measurement of non-profit business in a with-profit fund (noted above) and the change in fair value of this business included within the measurement of the with-profit contracts under the Variable Fee Approach;

•  the accounting mismatch resulting from buy-in contracts between the Group's pension schemes and Phoenix Life Limited, the Group's main insurance subsidiary. The mismatch represents the difference between the unwind of the IAS 19 discount rate calculated with reference to a AA-rated corporate bond and the expected investment returns on the backing assets; and

•  the effect of the mismatch between changes in estimates of future cash flows on General Model contracts measured at current discount rates and the corresponding adjustment to the CSM measured at the discount rate locked-in at inception.

Other

•  amortisation and impairment of intangible assets (net of policyholder tax);

•  finance costs attributable to owners;

•  gains or losses on the acquisition or disposal of subsidiaries (net of related costs);

•  the financial impacts of mandatory regulatory change;

•  the profit or loss attributable to non-controlling interests;

•  integration, restructuring or other significant one-off projects impacting the income statement; and

•  any other items which, in the Director's view, should be disclosed separately by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. This is typically the case where the nature of the item is not reflective of the underlying performance of the operating companies.

The items excluded from adjusted operating profit are referred to as 'non-operating items'. Whilst the excluded items are important to an assessment of the consolidated financial performance of the Group, management considers that the presentation of adjusted operating profit provides a good indicator of the underlying performance of the Group's operating segments and the Group uses this, as part of a suite of measures, for decision-making and monitoring performance. The Group's adjusted operating profit should be read in conjunction with the IFRS profit before tax.

Revisions to methodology

The methodology to determine adjusted operating profit has been revised, compared to that disclosed in the Interim Financial Report 2023, for the following items:

•  A 1-year (rather than a 15-year) risk-free rate has been used to derive the expected investment return assumption on assets backing insurance contract liabilities to reduce unintended economic volatility (see note B2.1);

•  an adjustment to remove mismatches between the discount rate used within the valuation of the Group's pension scheme liabilities and the returns on the underlying assets, as noted within Economic Variances above; and

•  a refinement to the approach used to quantify the level of trading profits.

The segmental result for the year ended 31 December 2022 presented in note B1.1 incorporates these revisions. The impact of these revisions is to reduce total segmental adjusted operating profit by £26 million, and correspondingly to increase economic variances by £26 million. There is no impact on the loss before the tax attributable to owners of the parent.


 

B1.1 Segmental result


Notes

2023

£m

2022

restated1

£m

Adjusted operating profit




Retirement Solutions


378

349

Pensions & Savings


190

150

With-Profits


10

54

Europe & Other


132

60

Corporate Centre


(93)

(69)

Total segmental adjusted operating profit


617

544





Economic variances

B2.2

147

(3,309)

Amortisation and impairment of acquired in-force business


(316)

(347)

Amortisation and impairment of other intangibles and goodwill

G2

(6)

(6)

Other non-operating items


(439)

(262)

Finance costs on borrowing attributable to owners


(195)

(199)

Loss before the tax attributable to owners of the parent


(192)

(3,579)





Profit before tax attributable to non-controlling interests


28

67





Loss before the tax attributable to owners


(164)

(3,512)

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

Other non-operating items in respect of the year ended 31 December 2023 include:

•  a gain on acquisition of £66 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of SLF of Canada UK Limited (see note H2 for further details);

•  £169 million of costs associated with strategic growth initiatives, including investment in digital and direct asset sourcing capabilities, establishment of the Group's Bermudan reinsurance operations, and transformation of the Group's operating model to support efficient growth;

•  £79 million of costs associated with the delivery of the Group Target Operating Model for IT and Operations, including the migration of policyholder administration onto the Tata Consultancy Services ('TCS') platform. Under IFRS 17, the expected costs in respect of this activity that are directly attributable to insurance contracts have been included within insurance contract liabilities;

•  costs of £65 million associated with the implementation of IFRS 17;

•  costs of £52 million associated with finance transformation activities, including the migration to cloud-based systems and enhancements to actuarial modelling capabilities and the related control environment;

•  costs of £49 million associated with the consolidation by Part VII transfer of four of the Group's Life Companies into a single entity, completed in the second half of 2023;

•  a £36 million adverse impact from the strengthening of actuarial reserves associated with the Part VII transfer of certain European business from the Group's UK Life Companies to a newly established European subsidiary;

•  £32 million of costs associated with ongoing integration programmes;

•  £12 million of past service costs in relation to a Group pension scheme (see note G1 for further details); and

•  Corporate project costs and net other one-off items totalling a cost of £11 million.

Other non-operating items in respect of the year ended 31 December 2022 include:

•  £73 million of costs associated with a strategic initiative to enhance capabilities to support the move towards the Group's strategic asset allocation alongside growth delivered through bulk purchase annuity transactions, investment in digital capability and transformation of operating model to support efficient growth;

•  £47 million related to the increase in expected costs associated with the delivery of the Group Target Operating Model for IT and Operations, following a strategic decision to re-phase the programme, together with the costs of migrating policyholder administration onto the TCS platform for certain legacy portfolios of business;

•  costs of £31 million associated with the ongoing ReAssure integration programme;

•  costs of £15 million associated with the implementation of IFRS 17;

•  £15 million of past service costs in relation to a Group pension scheme. Further details are included in note G1.1;

•  £14 million relating to a support package to help colleagues navigate cost of living challenges, which included giving all colleagues, except the most senior staff, a one-off net of tax payment of £1,000 in August 2022;

•  £12 million costs associated with the acquisition of SLF of Canada UK Limited; and

•  Corporate project costs and net other one-off items totalling a cost of £55 million.

Further details of the investment return variances and economic assumption changes on long-term business, and the variance on owners' funds are included in note B2.

B1.2 Segmental revenue

2023

Retirement Solutions

£m

Pensions & Savings

£m

With-Profits

£m

Europe & Other

£m

Total

£m

Revenue from external customers:






Insurance revenue

3,751

272

267

571

4,861

Fees and commissions

-

828

52

87

967

Total segmental revenue

3,751

1,100

319

658

5,828

 

2022 restated1

Retirement Solutions

£m

Pensions & Savings

£m

With-Profits

£m

Europe & Other

£m

Total

£m

Revenue from external customers:





Insurance revenue

3,544

307

636

655

5,142

Fees and commissions

-

733

35

90

858

Total segmental revenue

3,544

1,040

671

745

6,000

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

Of the revenue from external customers presented in the table above, £5,583 million (2022: £5,792 million) is attributable to customers in the United Kingdom ('UK') and £245 million (2022: £208 million) to the rest of the world. No revenue transaction with a single customer external to the Group amounts to greater than 10% of the Group's revenue.

The Group has total non-current assets (other than financial assets, deferred tax assets, pension schemes and rights arising under insurance contracts) of £3,622 million (2022: £3,622 million) located in the UK and £299 million (2022: £352 million) located in the rest of the world.

B2. Investment return variances and economic assumption changes

The long-term nature of much of the Group's operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an adjusted operating profit measure that incorporates an expected return on investments supporting its long-term business. The accounting policy adopted in the calculation of adjusted operating profit is detailed in note B1. The methodology for the determination of the expected investment return is explained below together with an analysis of investment return variances and economic assumption changes recognised outside of adjusted operating profit.

B2.1 Calculation of the long-term investment return

Adjusted operating profit for life assurance business is based on expected investment returns on financial investments backing shareholder, annuity, other non-profit business, With-Profit funds receiving shareholder support and surplus assets, with allowance for the corresponding movements in liabilities.

The methodology to determine the expected investment returns on financial investments has been revised, compared to that disclosed in the Interim Financial Report 2023, to use the 1-year (rather than 15-year) risk-free rate for deriving the expected investment return assumption on assets backing the insurance contract liabilities to reduce unintended economic volatility as set out in note B1. The information below for the year ended 31 December 2022 includes these revisions and is presented on a consistent basis to that at 31 December 2023.

The long-term risk-free rate used as the basis for deriving the long-term investment return is consistent with that set out in note F11.2.1 at the 1-year duration for assets backing the insurance contract liabilities and surplus cash assets, and at the 15-year duration for surplus non-cash assets.

A risk premium of 380 bps is added to the risk-free yield for equities (31 December 2022: 370 bps), 50 bps for properties (31 December 2022: 280 bps) and 130bps for debt securities (31 December 2022: 80 bps).

 

The principal assumptions, determined as at 1 January of each reporting period, underlying the calculation of the long-term investment return for surplus assets are:


2023

%

2022

 

%

Equities

7.4

4.6

Properties

4.1

3.7

Debt securities

4.9

1.7

During 2022 UK interest rates increased significantly, this had the impact of increasing the risk-free yield at the 15-year point by 271bps from 0.91% to 3.62%.

 

B2.2 Life assurance business

The economic variances excluded from the long-term business operating profit are as follows:


2023

 £m

2022

 £m

Economic variances

147

(3,309)

The net favourable economic variances of £147 million (2022: adverse £3,309 million) have primarily arisen as a result of a more stable market environment compared with the significant volatility experience during 2022. The impact of positive changes to discount rates, primarily on annuities and including the impact of methodology refinements (see note B2.1), more than offsets the losses arising from the impact of positive equity market movements on the hedges the Group holds to protect the Solvency II position. As the full value of future profits impacted by equity markets is not held on the IFRS balance sheet, this results in volatility in the Group's IFRS results .

B3. Earnings per share

The Group calculates its basic earnings per share based on the present shares in issue using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the year.

Diluted earnings per share are calculated based on the potential future shares in issue assuming the conversion of all potentially dilutive ordinary shares. The weighted average number of ordinary shares in issue is adjusted to assume conversion of dilutive share awards granted to employees.

The basic and diluted earnings per share calculations are also presented based on the Group's adjusted operating earnings net of financing costs. Adjusted operating profit is a non-GAAP performance measure that is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items.

The result attributable to ordinary equity holders of the parent for the purposes of determining earnings per share has been calculated as set out below.

2023

Adjusted operating profit

£m

Financing costs

£m

Adjusted operating earnings net of financing costs

£m

Other non-operating items

£m

Total

£m

Profit/(loss) before the tax attributable to owners

617

(195)

422

(586)

(164)

Tax (charge)/credit attributable to owners

(119)

46

(73)

149

76

Profit/(loss) for the year attributable to owners

498

(149)

349

(437)

(88)

Coupon paid on Tier 1 notes, net of tax relief

-

(22)

(22)

-

(22)

Deduct: Share of result attributable to non-controlling interests

-

-

-

(28)

(28)

Profit/(loss) for the year attributable to ordinary equity holders of the parent

498

(171)

327

(465)

(138)

 

2022 (restated)1

Adjusted operating profit

£m

Financing costs

£m

Adjusted operating earnings net of financing costs

£m

Other non-operating items

£m

Total

£m

Profit/(loss) before the tax attributable to owners

544

(199)

345

(3,857)

(3,512)

Tax (charge)/credit attributable to owners

(119)

43

(76)

931

855

Profit/(loss) for the year attributable to owners

425

(156)

269

(2,926)

(2,657)

Coupon paid on Tier 1 notes, net of tax relief

-

(22)

(22)

-

(22)

Deduct: Share of result attributable to non-controlling interests

-

-

-

(67)

(67)

Profit/(loss) for the year attributable to ordinary equity holders of the parent

425

(178)

247

(2,993)

(2,746)

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

The weighted average number of ordinary shares outstanding during the period is calculated as follows:


2023

Number

million

2022

Number

million

Issued ordinary shares at beginning of the year

1,000

1,000

Effect of ordinary shares issued

1

-

Effect of non-contingently issuable shares in respect of Group's long-term incentive plan

2

1

Own shares held by the employee benefit trust

(2)

(2)

Weighted average number of ordinary shares

1,001

999

The diluted weighted average number of ordinary shares outstanding during the period is 1,003 million (2022: 1,001 million). The Group's long-term incentive plan, deferred bonus share scheme and sharesave schemes increased the weighted average number of shares on a diluted basis by 2,259,377 shares for the year ended 31 December 2023 (2022: 1,841,988 shares). As losses have an anti-dilutive effect, none of the share-based awards had a dilutive effect in the calculation of basic earnings per share for either of the years ended 31 December 2022 or 31 December 2023.

Earnings per share disclosures are as follows:


2023

pence

2022

restated

pence

Basic earnings per share

(13.8)

(274.9)

Diluted earnings per share

(13.8)

(274.9)

Basic adjusted operating earnings net of financing costs per share

32.7

24.7

Diluted adjusted operating earnings net of financing costs per share

32.6

24.7

B4. Dividends

Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group's owners. Interim dividends are deducted from equity when they are paid.

Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period. Declared dividends are those that are appropriately authorised and are no longer at the discretion of the entity.


2023

 £m

2022

 £m

Dividends declared and paid in the year

520

496

On 10 March 2023, the Board recommended a final dividend of 26.0p per share in respect of the year ended 31 December 2022. The dividend was approved at the Group's Annual General Meeting, which was held on 4 May 2023. The dividend amounted to £260 million and was paid on 10 May 2023.

On 15 September 2023, the Board declared an interim dividend of 26.0p per share for the half year ended 30 June 2023. The dividend amounted to £260 million and was paid on 23 October 2023.

C. Other Income Statement notes

C1. Insurance Revenue

The Group's insurance revenue reflects the provision of services arising from a group of insurance contracts at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those services. Insurance revenue from a group of insurance contracts is therefore the relevant portion for the period of the total consideration for the contracts, (i.e. the amount of premiums paid to the Group adjusted for financing effect (the time value of money) and excluding any investment components). The total consideration for a group of contracts covers amounts related to the provision of services and is comprised of:

•  the release of the CSM;

•  changes in the risk adjustment for non-financial risk relating to current services;

•  claims and other insurance service expenses incurred in the period, generally measured at the amounts expected at the beginning of the period;

•  experience adjustments arising from premiums received in the period other than those that relate to future service;

•  insurance acquisition cash flows recovery which is determined by allocating the portion of premiums related to the recovery of those cash flows on the basis of the passage of time over the expected coverage of a group of contracts; and

•  other amounts, including any other pre-recognition cash flow assets derecognised at the date of initial recognition.

The amount of the CSM of a group of insurance contracts that is recognised as insurance revenue in each year is determined by identifying the coverage units in the group, allocating the CSM remaining at the end of the year equally to each coverage unit provided in the year and expected to be provided in future years, and recognising in profit or loss the amount of the CSM allocated to coverage units provided in the year.

The number of coverage units in a group is the quantity of service provided by the contracts in the group, determined by considering for each contract the quantity of benefits provided under a contract and its expected coverage period. The coverage units are reviewed and updated at each reporting date.

The Group consider the following when determining coverage units:

•  the quantity of benefits provided by contracts in the group;

•  the expected coverage period of contracts in the group;

•  the likelihood of insured events occurring, only to the extent that they affect the expected coverage period of contracts in the group;

•  for insurance contracts without direct participation features, the generation of an investment return for the policyholder, if applicable (investment-return service); and

•  for insurance contracts with direct participation features, the management of underlying items on behalf of the policyholder (investment-related service).

The coverage units for groups of reinsurance contracts held are determined based on the quantity of coverage provided by the reinsurance contracts held in the group but not the coverage provided by the insurer to its policyholders through the underlying insurance contracts. However, where the reinsurance held is a 100% quota share arrangement, it is expected that the coverage units would be consistent with the underlying insurance contracts. Where there is a change to the fulfilment cash flows of the group of underlying policies that does not adjust the CSM, it also would not adjust the CSM of the group of reinsurance contracts.

2023

Retirement Solutions

£m

Pensions & Savings

£m

With-Profits

£m

 Europe & Other

£m

Total

£m

Amounts relating to changes in liabilities for remaining coverage:






CSM recognised in period for services provided

260

25

77

47

409

Change in risk adjustment for non-financial risk

39

8

4

12

63

Expected incurred claims and other insurance service expenses

3,450

233

169

497

4,349

Policyholder tax charges

1

6

17

1

25

Amounts relating to recovery of insurance acquisition cash flows

1

-

-

14

15

Insurance revenue

3,751

272

267

571

4,861

Comprising contracts measured using:






Fair value approach at transition

1,887

262

257

420

2,826

Fully retrospective approach at transition and new contracts

1,864

10

10

151

2,035







2022

Retirement Solutions

£m

Pensions & Savings

£m

With-Profits

£m

Europe & Other

 £m

Total

£m

Amounts relating to changes in liabilities for remaining coverage:






CSM recognised in period for services provided

207

13

99

67

386

Change in risk adjustment for non-financial risk

76

11

8

7

102

Expected incurred claims and other insurance service expenses

3,260

300

546

564

4,670

Policyholder tax charges

-

(17)

(17)

1

(33)

Amounts relating to recovery of insurance acquisition cash flows

1

-

-

16

17

Insurance revenue

3,544

307

636

655

5,142

Comprising contracts measured using:






Fair value approach at transition

1,828

307

602

479

3,216

Fully retrospective approach at transition and new contracts

1,716

-

34

176

1,926

C2. Fees and commissions

Fees related to the provision of investment management services and administration services are recognised as services are provided. Front end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the life of the contract. No significant judgements are required in determining the timing or amount of fee income or the costs incurred to obtain or fulfil a contract.

The table below disaggregates fees and commissions by segment.

2023

Retirement Solutions

£m

Pensions & Savings

£m

With-Profits

£m

Europe & Other

£m

Total

£m

Fee income from investment contracts without DPF

-

814

52

60

926

Initial fees deferred during the year

-

-

-

(9)

(9)

Revenue from investment contracts without DPF

-

814

52

51

917

Other revenue from contracts with customers

-

14

-

36

50

Fees and commissions

-

828

52

87

967

 

2022 restated1

Retirement Solutions

£m

Pensions & Savings

£m

With-Profits

£m

Europe & Other

£m

Total

£m

Fee income from investment contracts without DPF

-

727

35

72

834

Initial fees deferred during the year

-

-

-

(9)

(9)

Revenue from investment contracts without DPF

-

727

35

63

825

Other revenue from contracts with customers

-

6

-

27

33

Fees and commissions

-

733

35

90

858

1Prior period comparatives have been restated on transition to IFRS17 Insurance Contracts (see note A2.1 for further details).

Remaining performance obligations

The practical expedient under IFRS 15 has been applied and remaining performance obligations are not disclosed as the Group has the right to consideration from customers in amounts that correspond with the performance completed to date. Specifically management charges become due over time in proportion to the Group's provision of investment management services.

In the period no amortisation or impairment losses from contracts with customers were recognised in the statement of comprehensive income.

C3. Net investment income

Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the Group defined benefit pension scheme asset/(liability), fair value gains and losses on financial assets (except for reinsurers' share of investment contract liabilities without DPF, see note E1), financial liabilities and investment property at fair value and impairment losses on loans and receivables.

Interest income is recognised in the consolidated income statement as it accrues using the effective interest method.

Dividend income is recognised in the consolidated income statement on the date the right to receive payment is established, which in the case of listed securities is the ex-dividend date.

Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.

Fair value gains and losses on financial assets and financial liabilities designated at fair value through profit or loss are recognised in the consolidated income statement. Fair value gains and losses includes both realised and unrealised gains and losses.


2023

£m

2022

restated1

£m

Investment income



Interest income on financial assets at amortised cost

37

21

Interest income on financial assets at FVTPL

3,901

2,888

Dividend income

5,923

5,409

Rental income

324

343

Net interest expense on Group defined benefit pension scheme (liability)/asset

(109)

(64)


10,076

8,597




Fair value gains/(losses)



Financial assets and financial liabilities at FVTPL:



Designated upon initial recognition

11,117

(38,539)

Mandatorily held

9

(6,707)

Investment property

(362)

(1,363)


10,764

(46,609)

Net investment income

20,840

(38,012)

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

C4. Net finance (expense)/income from insurance contracts

Insurance finance income and expenses comprise changes in the carrying amounts of groups of insurance contracts arising from the effects of the time value of money, financial risk and changes therein, unless any such changes for groups of direct participating contracts are allocated to a loss component and included in insurance service expenses. They include changes in the measurement of groups of contracts caused by changes in the value of underlying items. The Group presents insurance finance income or expenses in profit or loss.

2023

Retirement Solutions

£m

Pensions & Savings

£m

With-Profits

£m

Europe & Other

£m

Total

£m

Insurance contracts issued






Changes in fair value of underlying items of direct participating contracts

-

(581)

(629)

(376)

(1,586)

Group's share of changes in fair value of underlying items or fulfilment cash flows that do not adjust the CSM

-

10

-

-

10

Unwind of discount on fulfilment cash flows

(1,930)

(902)

(1,320)

(1,040)

(5,192)

Interest accreted on the CSM

(62)

-

(10)

(5)

(77)

Effect of changes in interest rates and other financial assumptions

31

(117)

45

(96)

(137)

Insurance finance expense

(1,961)

(1,590)

(1,914)

(1,517)

(6,982)

Reinsurance contracts held






Unwind of discount on fulfilment cash flows

272

-

47

6

325

Interest accreted on the CSM

23

-

3

-

26

Effect of changes in interest rates and other financial assumptions

(173)

-

(5)

6

(172)

Reinsurance finance income

122

-

45

12

179







Net insurance finance expense

(1,839)

(1,590)

(1,869)

(1,505)

(6,803)







2022

Retirement Solutions

£m

Pensions & Savings

£m

With-Profits

£m

Europe & Other

£m

Total

£m

Insurance contracts issued






Changes in fair value of underlying items of direct participating contracts

-

2,066

3,235

4,402

9,703

Unwind of discount on fulfilment cash flows

(698)

(9)

(144)

(8)

(859)

Interest accreted on the CSM

(44)

-

(6)

(5)

(55)

Effect of changes in interest rates and other financial assumptions

10,328

8

2,373

1,182

13,891

Policyholder tax

-

(42)

(15)

256

199

Insurance finance income

9,586

2,023

5,443

5,827

22,879






-

Reinsurance contracts held





-

Unwind of discount on fulfilment cash flows

87

-

43

12

142

Interest accreted on the CSM

15

-

3

-

18

Effect of changes in interest rates and other financial assumptions

(423)

-

(439)

(351)

(1,213)

Reinsurance finance expense

(321)

-

(393)

(339)

(1,053)







Net insurance finance income

9,265

2,023

5,050

5,488

21,826

There is a close relationship between the net investment income in note C3, as it relates to assets backing contracts within the scope of IFRS 17, and net insurance finance (expense)/income. Net investment income includes the results for all investment assets including those backing investment contracts and surplus assets.

For Retirement Solutions the principal product is annuities. The insurance finance (expense)/income primarily reflects the unwind of the discount rate on the liabilities. This is largely offset by the interest income earned, included within net investment income, on the assets backing the annuity contracts which primarily consist of debt securities and equity release mortgages. Changes in the discount rates used to discount the annuity cash flows in the measurement of the insurance contract liabilities are largely offset by changes in the fair value of the backing assets, included in net investment income, in respect of BEL and risk adjustment.

Mismatches between net investment income and insurance finance expense arises for the following reason:

•  the annuity business within the Retirement Solutions segment uses the General Model for measurement. As a result, the CSM is measured using discount rates locked in at inception, whereas the assets backing the CSM are based on current economic assumptions.

•  the discount rate for annuity business uses the Strategic Asset Allocation as set out in Note F11.2.1, and therefore insurance finance expenses are impacted by changes to this reference portfolio where the asset mix is based on the strategic investment objectives of the Group. Net investment income is determined with reference to the actual assets held by the Group during the reporting period.

•  changes in non-economic assumptions for General Model business impacts BEL and risk adjustment using current discount rates and CSM using locked in discount rates. This gives rise to a mismatch for which there is no corresponding item within net investment income.

For Pensions & Savings the principal products are unit-linked and hybrid contracts which contain an element of unit-linked and unitised with-profits within a single contract. These contracts are measured primarily using the Variable Fee Approach as the amounts payable to policyholders reflect a substantial share of the fair value returns on the backing assets. As a result the change in fair value of underlying items within insurance finance (expense)/income will be closely matched by changes in the backing assets which are also measured at fair value.

The unwind of discount rate on cash flows within insurance finance (expenses)/income is offset by the investment income recognised in respect of backing assets. The discount rate used for BEL and risk adjustment is determined on a bottom-up basis, as set out in note F11.2.1, based on the liquidity characteristics of the liabilities rather than with reference to the backing assets and therefore a mismatch occurs.

For With-Profits business there are differing impacts dependent on the nature of the liabilities within the fund. For with-profit business without guarantees the relationship between net investment income and insurance finance (expense)/income will be consistent with that for the business within Pensions & Savings. In respect of guarantees, the value of these is typically influenced by changes in interest rates. The Group hedges its interest rate risk in respect of these guarantees with derivatives such that the effect of changes in interest rates on guarantees within insurance finance (expense)/income are largely offset by changes in the fair value of the derivatives used for hedging in net investment income.

For non-profit business in a with-profit fund where profits from these contracts accrue to the with-profit policyholders or to the with-profit fund estate, the non-profit contracts and their backing assets are considered to be an underlying item of the with-profit contracts and therefore changes in their fair value are included within insurance finance (expense)/income.

The non-profit contracts are measured based on their substance. For non-profit annuities which fall within the scope of IFRS 17, they are measured using the IFRS 17 General Model and the treatment of the non-profit contract is consistent with the non-profit annuities within the Retirement Solutions segment. The effect of these non-profit annuities on the income statement does not match the change in fair value measurement used to measure their effect on the with-profit policyholders and therefore a mismatch arises. For unit-linked business which falls within the scope of IFRS 9 it is measured in line with the Group's accounting policy for investment contracts with this impact being taken through 'change in investment contract liabilities' and therefore is not included in net investment income. The assets backing the non-profit business in the with-profit fund are typically measured at fair value with investment income and changes in fair value being included within net investment income.

The Europe & Other segment contains business consistent with that in the segments noted above and will mirror the relationships between net investment income and insurance finance (expense)/income as noted above for the relevant type of business. In addition, this segment contains protection business which uses a bottom-up discount rate based on the liability characteristics rather than being based on the backing assets, which leads to mismatches between net investment income and insurance finance (expenses)/income.

C5. Expenses

Insurance service expenses

Insurance service expenses arising from insurance contracts are recognised in profit or loss generally as they are incurred. They exclude repayments of investment components and comprise the following items:

•  adjustment to liabilities for incurred claims and benefits, excluding investment components reduced by loss component allocations;

•  other incurred directly attributable expenses, including amounts of any other pre-recognition cash flows assets (other than insurance acquisition cash flows) derecognised at the date of initial recognition;

•  insurance acquisition cash flows amortisation;

•  insurance acquisition cash flows assets impairment; and

•  reversal of impairment of assets for insurance acquisition cash flows.

Net income or expense from reinsurance contracts held

Income and expenses from reinsurance contracts are presented separately from income and expenses from insurance contracts. Income and expenses from reinsurance contracts, other than insurance finance income or expenses, are presented on a net basis as 'net expenses from reinsurance contracts' in the insurance service result.

Net expenses from reinsurance contracts comprise an allocation of reinsurance premiums paid less amounts recovered from reinsurers.

The Group recognises an allocation of reinsurance premiums paid in profit or loss as it receives services under groups of reinsurance contracts. The allocation of reinsurance premiums paid relating to services received for each period represents the total of the changes in the asset for remaining coverage that relates to services for which the Group expects to pay consideration.

Administrative expenses

Administrative expenses are recognised in the consolidated income statement as incurred.

Total expenses are analysed by expenses type as follows:


2023

 £m

2022
restated1
£m

Claim and benefits

1,441

2,290

(Reversal of losses)/losses on onerous insurance contracts

(22)

531

Cost of retroactive cover on reinsurance contracts held

3

2

Employee costs

664

611

Outsourcer expenses

308

247

Professional fees

571

441

Commission expenses

155

145

Office and IT costs

260

172

Investment management expenses and transaction costs

413

569

Direct costs of collective investment schemes

20

25

Depreciation

21

19

Pension past service costs

13

15

Pension administrative expenses

7

7

Advertising and sponsorship

66

63

Other

78

26


3,998

5,163

Amounts attributed to Insurance acquisition cash flows incurred during the year

(154)

(128)

Amortisation of insurance acquisition cash flows

15

17

Total expenses

3,859

5,052

Reported within:



Insurance service expenses

4,354

5,248

Net expenses from reinsurance contracts2

(2,169)

(1,617)

Administrative expenses

1,674

1,421

Total expenses

3,859

5,052

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

2  Reported as part of the 'Net expenses from reinsurance contracts' balance in the consolidated income statement.

Employee costs comprise:


2023

 £m

2022

 £m

Wages and salaries

603

554

Social security contributions

61

57


664

611





2023

2022


Number

Number

Average number of persons employed

7,512

8,165

C6. Auditor's remuneration

During the year the Group obtained the following services from its auditor at costs as detailed in the table below.


2023

 £m

2022

 £m

Audit of the consolidated financial statements

12.7

4.8

Audit of the Company's subsidiaries

12.9

10.7


25.6

15.5

Audit-related assurance services

2.8

2.4

Total fee for assurance services

28.4

17.9




Total auditor's remuneration

28.4

17.9

No services were provided by the Company's auditors to the Group's pension schemes in either 2023 or 2022.

The increase in the audit fee during 2023 principally reflects the additional work undertaken in connection with the transition to IFRS 17.

Audit-related assurance services includes fees payable for services where the reporting is required by law or regulation to be provided by the auditor, such as reporting on regulatory returns. It also includes fees payable in respect of reviews of interim financial information and services where the work is integrated with the audit itself.

There were no other non-audit services provided during the year (2022: £nil).

Further information on auditor's remuneration and the assessment of the independence of the external auditor is set out in the Audit Committee report on pages 92 to 99.

C7. Finance costs

Interest payable is recognised in the consolidated income statement as it accrues and is calculated using the effective interest method.


2023

 £m

2022

 £m

Interest expense



On financial liabilities at amortised cost

256

227

On leases

2

3


258

230




Attributable to:



- policyholders

8

3

- owners

250

227


258

230

C8. Tax charge/(credit)

Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which case it is recognised in these statements.

Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the date of the statement of consolidated financial position together with adjustments to tax payable in respect of previous years.

The tax charge is analysed between tax that is payable in respect of policyholders' returns and tax that is payable on owners' returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year.

C8.1 Current year tax charge/(credit)


2023

 £m

2022

restated1

 £m

Current tax:



UK corporation tax

28

36

Overseas tax

110

86


138

122

Adjustment in respect of prior years

(16)

(23)

Total current tax charge

122

99

Deferred tax:



Origination and reversal of temporary differences

(14)

(1,348)

Change in the rate of UK corporation tax

(6)

(206)

Write down/(up) of deferred tax assets

6

23

Total deferred tax credit

(14)

(1,531)

Total tax charge/(credit)

108

(1,432)

Attributable to:



- policyholders

184

(577)

- owners

(76)

(855)

Total tax charge/(credit)

108

(1,432)

1  Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax credit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax charge attributable to policyholder earnings was £184 million (2022: £577 million credit).

The 2023 current tax prior year adjustment arises principally from the carry back of tax losses arising from adverse market movements in 2022. The carry back of losses reduces the tax charge relating to prior periods and is broadly offset by a reduction in tax losses carried forward to future periods, on which a deferred tax asset is recognised. This is partially offset by true-ups from the tax reporting provisions in various entities within the group.

The 2022 current tax prior year adjustment relates principally to a tax dispute with HMRC in relation to the tax treatment of an asset formerly held by Guardian Assurance Limited (before the business was transferred to ReAssure Limited) was resolved in the period in favour of the Group. The 2021 current tax liability included an accrual for the total tax under dispute. The matter was heard before the First Tier Tribunal in May 2022 and the Court found in favour of ReAssure Limited. HMRC did not appeal against this decision and so the accrual for the potential tax liability was released.

C8.2 Tax (credited)/charged to other comprehensive income


2023

 £m

2022

 £m

Current tax credit

(8)

-

Deferred tax (credit)/charge on defined benefit schemes

(13)

283


(21)

283

C8.3 Tax credited to equity


2023

 £m

2022

restated

 £m

Current and deferred tax credit on Tier 1 Notes

(7)

(7)

Deferred tax credit on unrealised gains and other items

(1)

(10)

Deferred tax charge on share schemes

-

2

Total tax credit

(8)

(15)

C8.4 Reconciliation of tax charge/(credit)


2023

 £m

2022

restated

 £m

Profit/(loss) for the year before tax

20

(4,089)

Policyholder tax (charge)/credit

(184)

577

Loss before the tax attributable to owners

(164)

(3,512)




Tax credit at standard UK rate of 23.5% (2022:19%)1

(39)

(668)

Non-taxable gains2

(16)

(4)

Disallowable expenses

1

3

Prior year tax charge/(credit) for shareholders3

12

(7)

Movement on acquired in-force amortisation at rates other than 23.5% (2022: 19%)

12

20

Profits taxed at rates other than 23.5% (2022: 19%)4

(25)

12

Derecognition of previously recognised deferred tax assets5

(39)

10

Deferred tax rate change6

(6)

(206)

Current year losses not valued7

18

(17)

Other

6

2

Owners' tax charge/(credit)

(76)

(855)

Policyholder tax charge/(credit)

184

(577)

Total tax charge/(credit) for the year

108

(1,432)

1  The Phoenix operating segments are predominantly in the UK. The reconciliation of tax charge has therefore, been completed by reference to the standard rate of UK tax.

2  Relates principally to a profit arising on consolidation due to the purchase of the SLF of Canada UK Limited, not subject to deferred tax.

3  The 2023 prior year tax charge relates to true-ups from the tax reporting provisions in various entities within the group.

4  Profits taxed at rates other than 23.5% relates to overseas profits, consolidated fund investments and UK life company profits subject to marginal shareholder tax rates

5  Relates principally to increases in the recognised value of tax attributes in SLIDAC offset by a reduction in the future value of capital losses in ReAssure Limited.

6  Deferred tax rate change relates primarily to movements in deferred tax liabilities which are expected to unwind at rates in excess of the current year rate of 23.5%.

7  Relates to losses accruing in Phoenix Life Assurance Europe DAC in relation to which a deferred tax asset cannot be recognised.

D. Equity

D1. Share Capital

The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of these shares are recognised in equity, net of tax.


2023

£m

2022

£m

Issued and fully paid:



1,001.5 million ordinary shares of £0.10 each (2022: 1,000.4 million)

100

100

The holders of ordinary shares are entitled to one vote per share on matters to be voted on by owners and to receive such dividends, if any, as may be declared by the Board of Directors in its discretion out of legally available profits.

Movements in issued share capital during the year:


2023

 Number

2023

 £

2022

 Number

2022

 £

Shares in issue at 1 January

1,000,352,477

100,035,247

999,536,058

99,953,605

Ordinary shares issued in the year

1,185,942

118,594

816,419

81,642

Shares in issue at 31 December

1,001,538,419

100,153,841

1,000,352,477

100,035,247

During the year, 1,185,942 shares (2022: 816,419) were issued at a premium of £6 million (2022: £4 million) in order to satisfy obligations to employees under the Group's sharesave schemes (see note I1).

The balance in the merger reserve arose upon the issuance of equity shares in 2020 as part consideration for the acquisition of the entire share capital of ReAssure Group plc. The Group has applied the relief in section 612 of the Companies Act 2006 to present the difference between the consideration received and the nominal value of the shares issued of £1,819 million in a merger reserve as opposed to in share premium.

D2. Shares held by the employee benefit trust

Where the Phoenix Group Employee Benefit Trust ('EBT') acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners' equity. Gains and losses on sales of shares held by the EBT are charged or credited to the own shares account in equity.

The EBT holds shares to satisfy awards granted to employees under the Group's share-based payment schemes.


2023

 £m

2022

 £m

At 1 January

13

12

Shares acquired by the EBT

14

13

Shares awarded to employees by the EBT

(12)

(12)

At 31 December

15

13

During the year 1,942,979 (2022: 1,764,660) shares were awarded to employees by the EBT and 2,477,897 (2022: 1,970,764) shares were purchased. The number of shares held by the EBT at 31 December 2023 was 2,626,940 (2022: 2,092,022).

The Company provided the EBT with an interest-free non-recourse facility arrangement to enable it to purchase the shares.

D3. Other Reserves

The other reserves comprise the owner-occupied property revaluation reserve and the cash flow hedging reserve.

Owner-occupied property revaluation reserve

This reserve comprises the revaluation surplus arising on revaluation of owner-occupied property. When a revaluation loss arises on a previously revalued asset it should be deducted first against the previous revaluation gain. Any excess impairment will then be recorded as an impairment expense in the consolidated income statement.

Cash flow hedging reserve

Where a cash flow hedging relationship exists, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement, and is reported in net investment income.

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item.

Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time is recycled to profit or loss over the period the hedged item impacts profit or loss.

Further details of the Group's hedge accounting policy are included in note E1.


Owner-occupied property revaluation reserve

Cash flow hedging reserve

Total other reserves

2023

£m

£m

£m

At 1 January 2023

-

46

46

Other comprehensive income/(expense) for the year

2

(32)

(30)

At 31 December 2023

2

14

16

 


Owner-occupied property revaluation reserve

Cash flow hedging reserve

Total other reserves

2022

£m

£m

£m

At 1 January 2022

5

51

56

Other comprehensive expense for the year

(5)

(5)

(10)

At 31 December 2022

-

46

46

In June 2021, the Group entered into four cross currency swaps which were designated as hedging instruments in order to effect cash flow hedges of the Group's Euro and US Dollar denominated borrowings (see note E5). Hedge accounting has been adopted effective from the date of designation of the hedging relationship. The objective of the hedging relationships is to hedge the risk of variability in functional currency equivalent cash flows with the foreign currency denominated borrowings due to changes in forward rates. The hedge ratio (i.e. the relationship between the quantity of the hedging instrument and the quantity of the hedged item in terms of their relative weighting) is such that there is an exact match in the relative weightings of the hedged items and hedging instruments within each of the hedging relationships.

D4. Tier 1 notes

The Fixed Rate Reset Perpetual Restricted Tier 1 Contingent Convertible Notes ('Tier 1 Notes') meet the definition of equity and accordingly are shown as a separate category within equity at the proceeds of issue. The coupons on the instruments are recognised as distributions on the date of payment and are charged directly to the statement of consolidated changes in equity.


2023

£m

2022

£m

Tier 1 Notes

494

494

On 26 April 2018, Old PGH (the Group's ultimate parent company up to December 2018) issued £500 million of Tier 1 Notes, the proceeds of which were used to fund a portion of the cash consideration for the acquisition of the Standard Life Assurance businesses. The Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.75% per annum up to the 'First Call Date' of 26 April 2028. Thereafter the fixed rate of interest will be reset on the First Call Date and on each fifth anniversary of this date by reference to a 5 year gilt yield plus a margin of 4.169%. Interest is payable on the Tier 1 Notes semi-annually in arrears on 26 October and 26 April. The coupon paid in the year was £29 million (2022: £29 million).

At the issue date, the Tier 1 Notes were unsecured and subordinated obligations of Old PGH. On 12 December 2018, the Company was substituted in place of Old PGH as issuer.

The Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company; accordingly the Tier 1 Notes meet the definition of equity for financial reporting purposes and are disclosed as such in the consolidated financial statements. If an interest payment is not made, it is cancelled and it shall not accumulate or be payable at any time thereafter.

The Tier 1 Notes may be redeemed at par on the First Call Date or on any interest payment date thereafter at the option of the Company and also in other limited circumstances. If such redemption occurs prior to the fifth anniversary of the Issue Date, such redemption must be funded out of the proceeds of a new issuance of, or exchanged into, Tier 1 Own Funds of the same or a higher quality than the Tier 1 Notes. In respect of any redemption or purchase of the Tier 1 Notes, such redemption or purchase is subject to the receipt of permission to do so from the PRA.

On 27 October 2020, the terms of the Tier 1 Notes were amended and the consequence of a trigger event, linked to the Solvency II capital position, was changed. Previously, the Tier 1 Notes were subject to a permanent write-down in value to zero. The amended terms require that the Tier 1 Notes would automatically be subject to conversion to ordinary shares of the Company at the conversion price of £1,000 per share, subject to adjustment in accordance with the terms and conditions of the notes and all accrued and unpaid interest would be cancelled. Following any such conversion there would be no reinstatement of any part of the principal amount of, or interest on, the Tier 1 Notes at any time.

D5. Non-controlling interests

Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the time of acquisition, adjusted for the relevant share of subsequent changes in equity.


APEOT

2023

£m

APEOT

2022

£m

At 1 January

532

460

Profit for the year

28

67

Dividends paid

(11)

(10)

Increase in non-controlling interests

-

15

At 31 December

549

532

The non-controlling interests of £549 million (2022: £532 million) reflects third party ownership of abrdn Private Equity Opportunities Trust plc ('APEOT') determined at the proportionate value of the third party interest in the underlying assets and liabilities. APEOT is a UK Investment Trust listed and traded on the London Stock Exchange. As at 31 December 2023, the Group held 53.6% (2022: 53.6%) of the issued share capital of APEOT.

The Group's interest in APEOT is held in the With-Profit and unit-linked funds of the Group's life companies. Therefore, the shareholder exposure to the results of APEOT is limited to the impact of those results on the shareholder share of distributed profits of the relevant fund.

Summary financial information showing the interest that non-controlling interests have in the Group's activities and cash flows is shown below:

APEOT

2023

£m

2022

£m

Statement of financial position:



Financial assets

586

554

Other assets

10

12

Total assets

596

566

Total liabilities

47

34

Income statement:



Net income

37

74

Profit after tax

28

67

Comprehensive income

28

67

Cash flows:



Net decrease in cash and cash equivalents

(1)

(7)

E. Financial assets & liabilities

E1. Fair values

Financial assets

Financial assets are to be classified into one of the following measurement categories: Fair value through profit or loss ('FVTPL'), fair value through other comprehensive income ('FVOCI') and amortised cost. Classification is made based on the objectives of the entity's business model for managing its financial assets and the contractual cash flow characteristics of the instruments.

Financial assets are measured at amortised cost where they have:

•  contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and interest on the principal amount outstanding; and

•  are held within a business model whose objective is achieved by holding to collect contractual cash flows.

These financial assets are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the financial asset. All transaction costs directly attributable to the acquisition are also included in the cost of the financial asset. Subsequent to initial recognition, these financial assets are carried at amortised cost, using the effective interest method.

Equities, debt securities, collective investment schemes, derivatives and certain loans and deposits and cash and cash equivalents are measured at FVTPL as they are managed and evaluated on a fair value basis.

Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset.

Where derivative financial instruments are held to hedge the Group's Euro and US Dollar borrowings, the effective portion of any gain or loss that arises on remeasurement to fair value is initially recognised in other comprehensive income and is recycled to profit or loss as the hedged item impacts the profit or loss. For such instruments, the timing of the recognition of any gain or loss that arises on remeasurement to fair value in profit or loss depends on the nature of the hedge relationship.

The Group has treaties in place with third party insurance companies to provide reinsurance in respect of liabilities that are linked to the performance of funds maintained by those companies. The contracts in question do not transfer significant insurance risk and therefore are classified as financial instruments and are valued at fair value through profit and loss. These contracts are disclosed under Reinsurers' share of investment contract liabilities in the statement of consolidated financial position.

Impairment of financial assets

The Group assesses the expected credit losses associated with its loans and deposits, receivables, cash and cash equivalents and other financial assets carried at amortised cost. The measurement of credit impairment is based on an Expected Credit Loss (' ECL') model and depends upon whether there has been a significant increase in credit risk.

For those credit exposures for which credit risk has not increased significantly since initial recognition, the Group measures loss allowances at an amount equal to the total expected credit losses resulting from default events that are possible within 12 months after the reporting date ('12-month ECL'). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, the Group measures and recognises an allowance at an amount equal to the expected credit losses over the remaining life of the exposure, irrespective of the timing of the default ('Lifetime ECL'). If the financial asset becomes 'credit-impaired' (following significant financial difficulty of issuer/borrower, or a default/breach of a covenant), the Group will recognise a Lifetime ECL. ECLs are derived from unbiased and probability-weighted estimates of expected loss.

The loss allowance reduces the carrying value of the financial asset and is reassessed at each reporting date. ECLs and subsequent remeasurements of the ECL, are recognised in the consolidated income statement.

Fair value estimation

The fair values of financial instruments traded in active markets such as publicly traded securities and derivatives are based on quoted market prices at the period end. The quoted market price used for financial assets is the applicable bid price on the period end date. The fair value of investments that are not traded in an active market is determined using valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on contractual cash flows using current market conditions and market calibrated discount rates and interest rate assumptions for similar instruments.

For units in unit trusts and shares in open-ended investment companies, fair value is determined by reference to published bid values. The fair value of receivables and floating rate and overnight deposits with credit institutions is their carrying value. The fair value of fixed interest-bearing deposits is estimated using discounted cash flow techniques.

Associates

Investments in associates that are held for investment purposes are accounted for under IFRS 9 Financial Instruments for the current period (2022: IAS 39 Financial Instruments: Recognition and Measurement) as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair value through profit or loss. There are no investments in associates which are of a strategic nature.

Derecognition of financial assets

A financial asset (or part of a group of similar financial assets) is derecognised where:

•  the rights to receive cash flows from the asset have expired;

•  the Group retains the right to receive cash flows from the assets, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or

•  the Group has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Financial liabilities

On initial recognition, financial liabilities are recognised when due and measured at the fair value of the consideration received less directly attributable transaction costs (with the exception of liabilities at FVTPL for which all transaction costs are expensed).

Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts without DPF and other liabilities designated at FVTPL) are measured at amortised cost using the effective interest method.

Financial liabilities are designated upon initial recognition at FVTPL where doing so results in more meaningful information because either:

•  it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or

•  a group of financial assets, financial liabilities or both is managed and its performance is evaluated and managed on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the investments is provided internally on that basis to the Group's key management personnel.

Investment contracts without DPF

Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts and accounted for as financial liabilities.

Receipts and payments on investment contracts without DPF are accounted for using deposit accounting, under which the amounts collected and paid out are recognised in the statement of consolidated financial position as an adjustment to the liability to the policyholder.

Investment contracts without DPF are measured at fair value which is determined using a valuation technique to provide a reliable estimate of the amount for which the liability could be transferred in an orderly transaction between market participants at the measurement date, subject to a minimum equal to the surrender value. The valuation of liabilities on unit-linked contracts are held at the fair value of the related assets and liabilities. The liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges.

Movements in the fair value of investment contracts without DPF and reinsurers' share of investment contract liabilities are included in Change in investment contract liabilities in the consolidated income statement.

Investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are performed. If the fees are for services provided in future periods, they are deferred and recognised over those periods. 'Front end' fees are charged on some non-participating investment contracts. Where the non-participating investment contract is measured at fair value, such fees which relate to the provision of future investment management services are deferred and recognised as the services are provided.

Net asset value attributable to unitholders

The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes which are consolidated by the Group. This interest is classified at FVTPL and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.

Obligations for repayment of collateral received

It is the Group's practice to obtain collateral in stock lending and derivative transactions, usually in the form of cash or marketable securities. Where cash collateral received is available to the Group for investment purposes, it is recognised as a 'financial asset' and the collateral repayable is recognised as 'obligations for repayment of collateral received' in the statement of consolidated financial position. The 'obligations for repayment of collateral received' are measured at amortised cost, which in the case of cash is equivalent to the fair value of the consideration received. Further details of the Group's collateral arrangements are included in note E4.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.

Offsetting financial assets and financial liabilities

Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. When financial assets and liabilities are offset any related interest income and expense is offset in the income statement.

Hedge accounting

The Group designates certain derivatives as hedging instruments in order to effect cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.

Where a cash flow hedging relationship exists, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in net investment income.

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item.

Hedge accounting is discontinued if: the Group's hedging objective has changed (can result in a partial discontinuance); the hedged item or hedging instrument no longer exists or is sold; there is no longer an economic relationship between the hedged item and the hedging instrument; or the effect of credit risk starts to dominate the value changes that result from the economic relationship. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time is recycled to profit or loss over the period the hedged item impacts profit or loss.

E1.1 Fair value analysis

The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2023:


Carrying value


2023

Total

£m

Amounts due for settlement after 12 months

£m

Fair value

£m

Financial assets




Financial assets mandatorily held at fair value through profit or loss ('FVTPL'):




Loans and deposits

231

4

231

Derivatives

2,769

2,338

2,769

Equities1

87,656

-

87,656

Investment in associate (see note H4)1

349

-

349

Debt securities

94,785

79,994

94,785

Collective investment schemes1

79,937

-

79,937

Reinsurers' share of investment contract liabilities1

9,700

-

9,700

Financial assets measured at amortised cost:




Loans and deposits

17

17

17

Total financial assets

275,444


275,444

Less amounts classified as financial assets held for sale (see note H3)2

(2,498)


(2,498)

Total financial assets less financial assets classified as held for sale

272,946


272,946

 


Carrying value


2023

Total

£m

Amounts due for settlement after 12 months

£m

Fair value

£m

Financial liabilities




Financial liabilities mandatorily held at FVTPL:




Derivatives

3,344

2,976

3,344

Financial liabilities designated at FVTPL upon initial recognition:




Borrowings

45

45

45

Net asset value attributable to unitholders1

2,921

-

2,921

Investment contract liabilities1

162,784

-

162,784

Financial liabilities measured at amortised cost:




Borrowings

3,847

3,757

3,739

Obligations for repayment of collateral received

1,005

-

1,005

Total financial liabilities

173,946


173,838

Less amounts classified as financial liabilities held for sale (see note H3)3

(4,782)


(4,782)

Total financial liabilities less financial liabilities held for sale

169,164


169,056

1    These assets and liabilities have no specified settlement date.

2    Amounts classified as financial assets held for sale include derivatives of £3 million, equities of £28 million, debt securities of £1,411 million, collective investment schemes of £1,028 million and reinsurers' share of investment contract liabilities of £28 million.

3    Amounts classified as financial liabilities held for sale include derivative liabilities of £2 million and investment contract liabilities of £4,780 million.


Carrying value


2022 restated1

Total

£m

Amounts due for settlement after 12 months

£m

Fair value

£m

Financial assets




Financial assets mandatorily held at FVTPL:




Held for trading - derivatives

4,071

3,353

4,071

Financial assets designated at FVTPL upon initial recognition:




Equities2

76,780

-

76,780

Investment in associate (see note H4)2

329

-

329

Debt securities

84,710

70,115

84,710

Collective investment schemes2

78,353

-

78,353

Reinsurers' share of investment contract liabilities2

9,090

-

9,090

Financial assets measured at amortised cost:




Loans and deposits

268

89

268

Total financial assets

253,601


253,601

Less amounts classified as financial assets held for sale (see note H3)3

(4,629)


(4,629)

Total financial assets less financial assets classified as held for sale

248,972


248,972

 


Carrying value


2022 restated1

Total

£m

Amounts

due for settlement

after 12 months

£m

Fair value

£m

Financial liabilities




Financial liabilities mandatorily held at FVTPL:




Held for trading - derivatives

5,879

5,118

5,879

Financial liabilities designated upon initial recognition:




Borrowings

64

64

64

Net asset value attributable to unitholders2

3,042

-

3,042

Investment contract liabilities2

149,481

-

149,481

Financial liabilities measured at amortised cost:




Borrowings

3,916

3,648

3,644

Obligations for repayment of collateral received

1,706

-

1,706

Total financial liabilities

164,088


163,816

Less amounts classified as financial liabilities held for sale(see note H3)4

(8,316)


(8,316)

Total financial liabilities less financial liabilities held for sale

155,772


155,500

1    Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

2    These assets and liabilities have no specified settlement date.

3    Amounts classified as financial assets held for sale include derivatives of £3 million, equities of £43 million, debt securities of £1,594 million, collective investment schemes of £2,964 million and reinsurers' share of investment contract liabilities of £25 million.

4    Amounts classified as financial liabilities held for sale include derivative liabilities of £4 million and investment contract liabilities of £8,312 million.

E1.2 impairment of financial assets held at amortised cost

The adoption of IFRS 9 has changed the Group's accounting for impairment losses for financial assets held at amortised cost by replacing IAS 39's incurred loss approach with a forward-looking expected credit loss ('ECL') approach. The new impairment model applies to the Group's financial assets carried at amortised cost.

A significant portion of the Group's financial assets are carried at FVTPL under IFRS 9 and are therefore not subject to ECL assessment. The financial assets classified as amortised cost and subject to ECL mainly relate to certain loan assets, other receivables and certain cash and cash equivalents balances.

For the in-scope financial assets at the reporting date either the lifetime expected credit loss or a 12-month expected credit loss is provided for, depending on the Group's assessment of whether the credit risk associated with the specific asset has increased significantly since initial recognition. The Group's current credit risk grading framework comprises the following categories:

Category

Description

Basis for recognising ECL

Performing

The counterparty has a low risk of default and does not have any past-due amounts

12 month ECL

Doubtful

There has been a significant increase in credit risk since initial recognition

Lifetime ECL - not credit impaired

In default

There is evidence indicating the asset is credit impaired

Lifetime ECL - credit impaired

Write-off

There is evidence indicating that the counterparty is in severe financial difficulty and the Group has no realistic prospect of recovery

Amount is written off

The financial assets held at amortised cost are assessed at transition as 'performing' and this assessment is summarised below.

Loans and deposits - the Group has assessed the estimated credit losses of these loans and deposits as low due to the external credit ratings of the counterparties resulting in low credit risk and there being no past-due amounts.

Other receivables - these balances relate to investment broker balances and other regular receivables due to the Group in the normal course of business. Expected credit losses are assessed as being immaterial given the typically short-term nature of these balances.

Cash and cash equivalents - the Group's cash and cash equivalents are held with banks and financial institutions, which have investment grade credit ratings of 'BBB' or above. The Group considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties and, there being no history of default. The impact to the net carrying amount stated in the table above is therefore not considered to be material.

Based on the above assessment, an immaterial credit loss balance has been determined due to these financial assets being predominantly short-term and having low credit risk.

E2. Fair value hierarchy

E2.1 Determination of fair value and fair value hierarchy of financial instruments

Level 1 financial instruments

The fair value of financial instruments traded in active markets (such as exchange traded securities and derivatives) is based on quoted market prices at the period end provided by recognised pricing services. Market depth and bid-ask spreads are used to corroborate whether an active market exists for an instrument. Greater depth and narrower bid-ask spread indicate higher liquidity in the instrument and are classed as Level 1 inputs. For collective investment schemes and reinsurers' share of investment contract liabilities, fair value is by reference to published bid prices.

Level 2 financial instruments

Financial instruments traded in active markets with less depth, or wider bid-ask spreads, which do not meet the classification as Level 1 inputs, are classified as Level 2. The fair values of financial instruments not traded in active markets are determined using broker quotes or valuation techniques with observable market inputs. Financial instruments valued using broker quotes are classified as Level 2, only where there is a sufficient range of available quotes. The fair value of over-the-counter derivatives is estimated using pricing models or discounted cash flow techniques. Collective investment schemes where the underlying assets are not priced using active market prices are determined to be Level 2 instruments. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flows are used, estimated future cash flows are based on management's best estimates and the discount rate used is a market related rate for a similar instrument. The fair value of investment contract liabilities reflects the fair value of the underlying assets and liabilities in the funds plus an additional amount to cover the present value of the excess of future policy costs over future charges. The liabilities are consequently determined to be Level 2 instruments.

Level 3 financial instruments

The Group's financial instruments determined by valuation techniques using non-observable market inputs are based on a combination of independent third party evidence and internally developed models. In relation to investments in hedge funds and private equity investments, non-observable third party evidence in the form of net asset valuation statements is used as the basis for the valuation. Adjustments may be made to the net asset valuation where other evidence, for example recent sales of the underlying investments in the fund, indicates this is required. Securities that are valued using broker quotes which could not be corroborated across a sufficient range of quotes are considered as Level 3. For a small number of investment vehicles and debt securities, standard valuation models are used, as due to their nature and complexity they have no external market. Inputs into such models are based on observable market data where applicable. The fair value of loans, derivatives and some borrowings with no external market is determined by internally developed discounted cash flow models using appropriate assumptions corroborated with external market data where possible.

For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) during each reporting period.

Fair value hierarchy information for non-financial assets measured at fair value is included in note G3 for owner-occupied property and in note G4 for investment property.

E2.2 Fair value hierarchy of financial instruments

The tables below separately identify financial instruments carried at fair value from those measured on another basis but for which fair value is disclosed.

2023

Level 1

£m

Level 2

£m

Level 3

£m

Total fair value

£m

Financial assets measured at fair value





Financial assets mandatorily held at FVTPL





Loans and deposits

-

231

-

231

Derivatives

139

2,398

232

2,769

Equities

85,029

132

2,495

87,656

Investment in associate

349

-

-

349

Debt securities

45,529

35,438

13,818

94,785

Collective investment schemes

76,343

3,193

401

79,937

Reinsurers' share of investment contract liabilities

9,700

-

-

9,700

Total financial assets measured at fair value

217,089

41,392

16,946

275,427

Less amounts classified as held for sale

(1,639)

(181)

(678)

(2,498)

Total financial assets measured at fair value, excluding amounts classified as held for sale

215,450

41,211

16,268

272,929

Financial assets measured at amortised cost for which fair values are disclosed





Loans and deposits

-

17

-

17


215,450

41,228

16,268

272,946

 

2023

Level 1

£m

Level 2

£m

Level 3

£m

Total fair value

£m

Financial liabilities measured at fair value





Financial liabilities designated at FVTPL





Derivatives

152

2,986

206

3,344

Financial liabilities designated at FVTPL upon initial recognition:





Borrowings

-

-

45

45

Net asset value attributable to unitholders

2,921

-

-

2,921

Investment contract liabilities

-

162,784

-

162,784


2,921

162,784

45

165,750

Total financial liabilities measured at fair value

3,073

165,770

251

169,094

Less amounts classified as held for sale

-

(4,782)

-

(4,782)

Total financial liabilities measured at fair value, excluding amounts classified as held for sale

3,073

160,988

251

164,312

Financial liabilities measured at amortised cost for which fair values are disclosed





Borrowings

-

3,739

-

3,739

Obligations for repayment of collateral received

-

1,005

-

1,005

Total financial liabilities measured at amortised cost for which fair values are disclosed

-

4,744

-

4,744


3,073

165,732

251

169,056

 

2022 restated1

Level 1

£m

Level 2

£m

Level 3

£m

Total fair value

£m

Financial assets measured at fair value





Financial assets mandatorily held at FVTPL





Derivatives

165

3,754

152

4,071

Financial assets designated at FVTPL upon initial recognition:





Equities

74,464

124

2,192

76,780

Investment in associate

329

-

-

329

Debt securities

48,151

25,094

11,465

84,710

Collective investment schemes

75,962

2,079

312

78,353

Reinsurers' share of investment contract liabilities

9,090

-

-

9,090


207,996

27,297

13,969

249,262

Total financial assets measured at fair value

208,161

31,051

14,121

253,333

Less amounts classified as held for sale

(3,661)

(179)

(789)

(4,629)

Total financial assets measured at fair value, excluding amounts classified as held for sale

204,500

30,872

13,332

248,704

Financial assets measured at amortised cost for which fair values are disclosed





Loans and deposits

-

261

7

268


204,500

31,133

13,339

248,972

 

2022 restated1

Level 1

£m

Level 2

£m

Level 3

£m

Total fair value

£m

Financial liabilities measured at fair value





Financial liabilities mandatorily at FVTPL





Derivatives

98

5,538

243

5,879

Financial liabilities designated at FVTPL upon initial recognition:





Borrowings

-

-

64

64

Net asset value attributable to unitholders

3,042

-

-

3,042

Investment contract liabilities

-

149,481

-

149,481


3,042

149,481

64

152,587

Total financial liabilities measured at fair value

3,140

155,019

307

158,466

Less amounts classified as held for sale

-

(8,316)

-

(8,316)

Total financial liabilities measured at fair value, excluding amounts classified as held for sale

3,140

146,703

307

150,150

Financial liabilities measured at amortised cost for which fair values are disclosed





Borrowings

-

3,644

-

3,644

Obligations for repayment of collateral received

-

1,706

-

1,706

Total financial liabilities measured at amortised cost for which fair values are disclosed

-

5,350

-

5,350


3,140

152,053

307

155,500

1. Prior period comparatives have been restated on transition to IFRS 17 Insurance Contracts (see note A2.1 for further details).

E2.3 Significant inputs and input values for Level 3 financial instruments




Key unobservable input value

Description

Valuation technique

Significant inputs

2023

2022

Equities

Single broker1 and net asset value2

Single broker indicative price

N/A

N/A

Debt securities (see E2.3.1 for further details)





Loans guaranteed by export credit agencies & supranationals

DCF model3

Credit spread

78bps

(weighted average)

111bps

(weighted average)

Private corporate credit

DCF model3

Credit spread

145bps

(weighted average)

169bps

(weighted average)

Infrastructure loans

DCF model3

Credit spread

160bps

(weighted average)

220bps

(weighted average)

Loans to housing associations

DCF model3

Credit spread

139bps

(weighted average)

164bps

(weighted average)

Local authority loans

DCF model3

Credit spread

130bps

(weighted average)

137bps

(weighted average)

Equity Release Mortgage loans ('ERM')

DCF model and Black-Scholes model4

Spread

256bps over Sonia plus 36bps

260bps over the IFRS reference curve

House price inflation

+75bps adjustment to RPI

+75bps adjustment to RPI

House prices

£280,316 (average)

£304,088 (average)

Mortality

Average life expectancy of a male and female currently aged 75 is 14.1 years and 15.6 years respectively

Average life expectancy of a male and female currently aged 75 is 14.5 years and 15.9 years respectively

Voluntary redemption rate

190bps to 650bps

150bps to 700bps

Commercial real estate loans

DCF model3

Credit spread

253bps

(weighted average)

253bps

(weighted average)

Income strips 5

Income capitalisation

Credit spread

613bps

661bps

Collective investment schemes

Net asset value statements2

N/A

N/A

N/A

Borrowings





Property reversions loans (see note E5)

Internally developed model

Mortality rate

130% IFL92C15 (Female) 6

130% IFL92C15 (Female) 6


130% IML92C15 (Male) 6

130% IML92C15 (Male) 6

House price inflation

3-year RPI rate plus 75bps

3-year RPI rate plus 75bps

Discount rate

3-year swap rate plus 170 bps

3-year swap rate plus 170 bps

Deferred possession rate

370bps

370bps

Derivative assets and liabilities





Forward private placements, infrastructure and local authority loans 7

DCF model3

Credit spread

111bps

(weighted average)

145bps

(weighted average)

Longevity swaps 8

DCF model3

Swap curve

swap curve

swap curve + 36bps

Equity Release Income Plan total return swap 9

DCF model3

Credit spread

500bps

500bps

1    Broker indicative prices: Although such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.

2    Net asset value statements: Net asset statements are provided by independent third parties, and therefore no significant non-observable input or sensitivity information has been prepared for those instruments valued on this basis.

3    Discounted cash flow ('DCF') model: Except where otherwise stated, the discount rate used is based on a risk-free curve and a credit spread. The risk-free rate is taken from an appropriate gilt of comparable duration. The spread is derived from a basket of comparable securities.

4    ERM loans: The loans are valued using a DCF model and a Black-Scholes model for valuation of the No-Negative Equity Guarantee ('NNEG'). The NNEG caps the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property. The future cash flows are estimated based on assumed levels of mortality derived from published mortality tables, entry into long-term care rates and voluntary redemption rates. Cash flows include an allowance for the expected cost of providing a NNEG assessed under a real world approach using a closed form model including an assumed level of property value volatility. For the NNEG assessment, property values are indexed from the latest property valuation point and then assumed to grow in line with an RPI based assumption. Cash flows are discounted using a risk free curve plus a spread, where the spread is based on recent originations, with margins to allow for the different risk profiles of ERM loans.

5    Income strips are transactions where an owner-occupier of a property has sold a freehold or long leasehold interest to the Group, and has signed a long lease (typically 30-45 years) or a ground lease (typically 45-175 years) and retains the right to repurchase the property at the end of the lease for a nominal sum (usually £1). The income strips are valued using an income capitalisation approach, where the annual rental income is capitalised using an appropriate yield. The yield is determined by considering recent transactions involving similar income strips.

6    IFL92C15 and IML92C15 relate to immediate annuitant female and male lives and refer to the 92 series mortality tables produced by the Continuous Mortality Investigation (CMI).

7    Derivative liabilities include forward investments of £54 million (2022: £146 million) which include a commitment to acquire or provide funding for fixed rate debt instruments at specified future dates.

8    Included within derivative assets and liabilities are longevity swap contracts with corporate pension schemes with a fair value of £230 million (2022: £152 million) and £100 million (2022: £34 million) respectively.

9    Included within derivative liabilities is the Equity Release Income Plan ('ERIP') total return swap with a value of £50 million (2022: £63 million), under which a share of the disposal proceeds arising on a portfolio of property reversions is payable to a third party (see note E.3.3 for further details).

E2.3.1 Debt securities

Analysis of Level 3 debt securities

2023

£m

2022

£m

Unquoted corporate bonds:



Loans guaranteed by export credit agencies & supranationals

486

402

Private corporate credit

1,829

1,422

Infrastructure loans - project finance

1,097

882

Infrastructure loans - corporate

1,493

1,175

Loans to housing associations

1,186

691

Local authority loans

932

596

Equity release mortgages

4,486

3,934

Commercial real estate loans

1,147

1,104

Income strips

674

786

Bridging loans to private equity funds

470

462

Other

18

11

Total Level 3 debt securities

13,818

11,465

Less amounts classified as held for sale

(674)

(786)

Total Level 3 debt securities excluding amounts classified as held for sale

13,144

10,679

E2.4 Sensitivities of Level 3 instruments


2023

£m

2022

£m

Debt securities - Loans guaranteed by export credit agencies & supranationals



65 bps increase in spread

(13)

(9)

65 bps decrease in spread

14

11

Debt securities - Private corporate credit



65 bps increase in spread

(103)

(98)

65 bps decrease in spread

116

112

Debt securities - Infrastructure loans



65 bps increase in spread

(129)

(103)

65 bps decrease in spread

134

107

Debt securities - Loans to housing associations



65 bps increase in spread

(93)

(54)

65 bps decrease in spread

105

58

Debt securities - Local authority loans



65 bps increase in spread

(82)

(51)

65 bps decrease in spread

90

55

Debt securities - ERM loans



100bps increase in spread

(373)

(329)

100bps decrease in spread

410

370

5% increase in mortality

16

13

5% decrease in mortality

(18)

(14)

15% increase in voluntary redemption rate

44

49

15% decrease in voluntary redemption rate

(47)

(52)

1% increase in house price inflation

52

27

1% decrease in house price inflation

(74)

(42)

10% increase in house prices

38

22

10% decrease in house prices

(59)

(38)

Debt securities - CRELs



65 bps increase in spread

(44)

(18)

65 bps decrease in spread

48

19

Debt securities - Income strips



65bps increase in spread (2022: 35 bps increase in spread)

(89)

(76)

65bps decrease in spread (2022: 35 bps decrease in spread)

109

88

Derivatives - Forward private placements, infrastructure and local authority loans



65 bps increase in spread

(6)

(30)

65 bps decrease in spread

7

31

Derivatives - Longevity swap contracts



100bps increase in swap curve

(20)

(17)

100bps decrease in swap curve

25

21

Derivatives - Equity Release Income Plan total return swap



100bps increase in spread

1

2

100bps decrease in spread

(1)

(2)

For the property reversions loans and bridging loans to private equity funds, there are no reasonably possible movements in unobservable input values which would result in a significant movement in the fair value of the financial instruments.

For those assets valued using net asset value statements (equities and collective investment schemes) no sensitivity information has been prepared as the net asset statements are provided by independent third parties.

E2.5 Transfers of financial instruments between Level 1 and Level 2

2023

From Level 1 to Level 2

£m

From Level 2 to Level 1

£m

Financial assets measured at fair value



Financial assets mandatorily held at FVTPL



Derivatives

-

21

Equities

10

12

Debt securities

1,023

725

Collective investment schemes1

1,188

16

1  As a result of the assessment of the liquidity of the underlying investments held within collective investment schemes, in accordance with the Group's fair value hierarchy classification methodology a net £1,172 million of collective investment schemes has transferred from Level 1 to Level 2.

2022

From Level 1 to Level 2

£m

From Level 2 to Level 1

£m

Financial assets measured at fair value



Financial assets mandatorily held at FVTPL



Derivatives

48

-

Financial assets designated at FVTPL upon initial recognition:



Equities

73

5

Debt securities

1,478

1,267

Collective investment schemes

28

-

Consistent with the prior year, all the Group's Level 1 and Level 2 assets have been valued using standard market pricing sources.

The application of the Group's fair value hierarchy classification methodology at an individual security level, in particular observations with regard to measures of market depth and bid-ask spreads, resulted in an overall net movement of debt securities from Level 1 to Level 2 in both the current and prior period.

E2.6 Movement in Level 3 financial instruments measured at fair value

2023

At 1 January 2023

£m

Reclassification of balances on transition to IFRS 91

£m

At 1 January 2023 (restated)

£m

Net (losses)/gains in income statement

£m

Purchases

£m

Sales

£m

Transfers

 from

Level 1

and Level 2

£m

Transfers to Level 1 and Level 2

£m

At 31 December 20232

£m

Unrealised

gains on assets held at end of period

£m

Financial assets measured at fair value











Financial assets mandatorily held at FVTPL:











Loans and deposits

-

7

7

(1)

-

(6)

-

-

-

-

Derivatives

152

-

152

80

-

-

-

-

232

80

Equities

2,192

-

2,192

163

433

(293)

2

(2)

2,495

14

Debt securities

11,465

-

11,465

416

7,011

(5,224)

150

-

13,818

475

Collective investment schemes

312

-

312

46

47

(5)

1

-

401

46

Total financial assets measured at fair value

14,121

7

14,128

704

7,491

(5,528)

153

(2)

16,946

615

1  See note A2.2.1 for further details.

2  Total financial assets of £16,946 million includes £678 million of assets classified as held for sale.

2023

At 1 January 2023

£m

Net losses in income statement

£m

Purchases

£m

Sales/repayments

£m

Transfers from

 Level 1 and Level 2

£m

Transfers to Level 1 and Level 2

£m

At 31 December 2023

£m

Unrealised losses on liabilities held at end of period

£m

Financial liabilities measured at fair value









Financial liabilities mandatorily held at FVTPL:









Derivatives

243

67

-

(104)

-

-

206

59

Financial liabilities designated at FVTPL upon initial recognition:









Borrowings

64

2

-

(21)

-

-

45

2

Total financial liabilities measured at fair value

307

69

-

(125)

-

-

251

61

 

2022

At 1 January 2022

£m

Net (losses)/gains in income statement

£m

Purchases

£m

Sales

£m

Transfers

 from

Level 1

and Level 2

£m

Transfers to Level 1 and Level 2

£m

At 31 December 20221

£m

Unrealised (losses)/gains on assets held at end of period

£m

Financial assets measured at fair value









Financial assets mandatorily held at FVTPL:









Derivatives

237

(85)

-

-

-

-

152

(85)

Financial assets designated at FVTPL upon initial recognition:









Equities

1,899

177

438

(369)

47

-

2,192

12

Debt securities

12,452

(3,544)

6,838

(4,277)

2

(6)

11,465

(3,595)

Collective investment schemes

286

(79)

108

(3)

-

-

312

(73)


14,637

(3,446)

7,384

(4,649)

49

(6)

13,969

(3,656)










Total financial assets measured at fair value

14,874

(3,531)

7,384

(4,649)

49

(6)

14,121

(3,741)

1  Total financial assets of £14,121 million includes £789 million classified as held for sale.

2022

At 1 January 2022

£m

Net losses in income statement

£m

Purchases

£m

Sales/

Repayments

£m

Transfers from

 Level 1 and Level 2

£m

Transfers to Level 1 and Level 2

£m

At 31 December 20221

£m

Unrealised losses on liabilities held at end of period

£m

Financial liabilities measured at fair value









Financial liabilities mandatorily held at FVTPL:









Derivatives

125

130

-

(12)

-

-

243

123

Financial liabilities designated at FVTPL upon initial recognition:









Borrowings

70

9

-

(15)

-

-

64

9

Total financial liabilities measured at fair value

195

139

-

(27)

-

-

307

132

Gains and losses on Level 3 financial instruments are included in net investment income in the consolidated income statement. There were no gains or losses recognised in other comprehensive income in either the current or comparative period.

E3. Derivatives

The Group purchases derivative financial instruments principally in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling and repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin. The Group also holds derivatives which are designated as hedging instruments in order to hedge the Group's Euro and US Dollar borrowings. These hedging relationships qualify for hedge accounting under IFRS 9 and are designated as cash flow hedges.

Derivative financial instruments are recognised initially at fair value and are subsequently remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement where the derivatives are held for trading. Where derivative financial instruments are held to hedge the Group's Euro and US Dollar borrowings, the effective portion of any gain or loss that arises on remeasurement to fair value is initially recognised in other comprehensive income and is recycled to profit or loss as the hedged item impacts the profit or loss. See notes E1 and D3 for further details of the Group's hedging accounting policy.

E3.1 Summary

The fair values of derivative financial instruments are as follows:


Assets

2023

£m

Liabilities

2023

£m

Assets

2022

£m

Liabilities

2022

£m

Forward currency

265

97

327

221

Credit default swaps

9

2

4

18

Contracts for difference

2

1

3

3

Interest rate swaps

1,456

2,290

2,281

4,313

Swaptions

164

65

187

46

Inflation swaps

187

142

295

104

Equity options

107

106

334

147

Stock index futures

18

87

162

36

Fixed income futures

84

124

95

231

Longevity swap contracts

230

100

152

34

Currency futures

15

5

4

8

Cross currency swaps

232

274

227

653

Equity Release Income Plan total return swap

-

50

-

63

Other

-

1

-

2


2,769

3,344

4,071

5,879

Less amounts classified as held for sale

(3)

(2)

(3)

(4)


2,766

3,342

4,068

5,875

E3.2 Longevity swap contracts

The Group has in place longevity swap arrangements with corporate pension schemes which do not meet the definition of insurance contracts under the Group's accounting policies. Under these arrangements the majority of the longevity risk has been passed to third parties. Derivative assets of £230 million and derivative liabilities of £100 million have been recognised as at 31 December 2023 (2022: £152 million and £34 million respectively).

E3.3 Equity Release Income Plan ('ERIP') total return swap

ERIP contracts are an equity release product under which the Group holds a reversionary interest in the residential property of policyholders who have been provided with a lifetime annuity in return for the legal title to their property (see note G4). The Group is party to an ERIP total return swap under which a share of the future generated cash flows arising under the ERIP contracts is payable to a third party. Over time, as the property reversions are realised, the relevant share of disposal proceeds is transferred to a third party who also holds a beneficial interest in these residential properties. The carrying amount of the derivative liability is the present value of all future cash flows due to the third party under the total return swap.

E4. Collateral arrangements

The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, derivative contracts and reinsurance arrangements in order to reduce the credit risk of these transactions. The amount and type of collateral required where the Group receives collateral depends on an assessment of the credit risk of the counterparty, but is usually in the form of cash and marketable securities.

Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated and is available to the Group for investment purposes, is recognised as a financial asset in the statement of consolidated financial position with a corresponding financial liability for its repayment. Non-cash collateral received is not recognised in the statement of consolidated financial position, unless the counterparty defaults on its obligations under the relevant agreement.

Non-cash collateral pledged where the Group retains the contractual rights to receive the cash flows generated is not derecognised from the statement of consolidated financial position, unless the Group defaults on its obligations under the relevant agreement. Cash collateral pledged, where the counterparty has contractual rights to receive the cash flows generated, is derecognised from the statement of consolidated financial position and a corresponding receivable is recognised for its return.

The Group is also party to reverse repurchase agreements under which securities are purchased from third parties with an obligation to resell the securities. The securities are not recognised as financial assets on the statement of consolidated financial position, unless the counterparty defaults on its obligations under the relevant agreement. The right to receive the return of any cash paid as purchase consideration plus interest is recognised as a financial asset on the statement of financial position.

E4.1 Financial instrument collateral arrangements

The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated financial position as at 31 December 2023 (2022: none).

The table below contains disclosures related to financial assets and financial liabilities recognised in the statement of consolidated financial position that are subject to enforceable master netting arrangements or similar agreements. Such agreements do not meet the criteria for offsetting in the statement of consolidated financial position as the Group has no current legally enforceable right to offset recognised financial instruments. Furthermore, certain related assets received as collateral under the netting arrangements will not be recognised in the statement of consolidated financial position as the Group does not have permission to sell or re-pledge, except in the case of default. Details of the Group's collateral arrangements in respect of these recognised assets and liabilities are provided below.



Related amounts not offset



Gross and net amounts of recognised

financial assets

Financial instruments and cash collateral received

Derivative liabilities

Net

 amount

2023

£m

£m

£m

£m

Financial assets





OTC derivatives

2,629

976

1,459

194

Exchange traded derivatives

137

33

28

76

Stock lending

836

836

-

-

Repurchase arrangement

100

100

-

-

Total

3,702

1,945

1,487

270








Related amounts not offset



Gross and net amounts of recognised

financial liabilities

Financial instruments and cash collateral pledged

Derivative assets

Net

 amount


£m

£m

£m

£m

Financial liabilities





OTC derivatives

3,126

1,520

1,459

147

Exchange traded derivatives

216

68

28

120

Total

3,342

1,588

1,487

267








Related amounts not offset



Gross and net amounts of recognised

financial assets

Financial instruments and cash collateral received

Derivative liabilities

Net

 amount

2022

£m

£m

£m

£m

Financial assets





OTC derivatives

3,747

1,055

2,293

399

Exchange traded derivatives

324

193

28

103

Stock lending

1,451

1,451

-

-

Total

5,522

2,699

2,321

502








Related amounts not offset



Gross and net amounts of recognised

financial liabilities

Financial instruments and cash collateral pledged

Derivative assets

Net

 amount


£m

£m

£m

£m

Financial liabilities





OTC derivatives

5,606

2,206

2,293

1,107

Exchange traded derivatives

273

36

28

209

Total

5,879

2,242

2,321

1,316

E4.2 Derivative collateral arrangements

Assets accepted

It is the Group's practice to obtain collateral to mitigate the counterparty risk related to over-the-counter ('OTC') derivatives usually in the form of cash or marketable financial instruments.

The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of consolidated financial position amounts to £505 million (2022: £471 million).

The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2023 are set out below.


OTC derivatives


2023

2022


£m

£m

Financial assets

971

1,513

Financial liabilities

(971)

(1,513)

The maximum exposure to credit risk in respect of OTC derivative assets is £2,629 million (2022: £3,747 million) of which credit risk of £2,434 million (2022: £3,348 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed to the counterparty).

Credit risk on exchange traded derivative assets of £137 million (2022: £324 million) is mitigated through regular margining and the protection offered by the exchange.

Assets pledged

The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2023 in respect of OTC derivative liabilities of £3,126 million (2022: £5,606 million) amounted to £1,936 million (2022: £3,228 million).

E4.3 Stock lending collateral arrangements

The Group lends listed financial assets held in its investment portfolio to other institutions.

The Group conducts stock lending only with well-established, reputable institutions in accordance with established market conventions. The financial assets do not qualify for derecognition as the Group retains all the risks and rewards of the transferred assets except for the voting rights.

It is the Group's practice to obtain collateral in stock lending transactions, usually in the form of cash or marketable financial instruments.

The fair value of financial assets accepted as such collateral but not recognised in the statement of consolidated financial position amounts to £897 million (2022: £1,586 million).

The maximum exposure to credit risk in respect of stock lending transactions is £836 million (2022: £1,451 million) of which credit risk of £833 million (2022: £1,451 million) is mitigated through the use of collateral arrangements.

 E4.4 Other collateral arrangements

At 31 December 2023, the Group had entered into reverse repurchase transactions under which it purchased securities and had taken on the obligation to resell the securities. The fair value of the financial assets accepted as collateral in respect of these transactions, but not recognised in the statement of consolidated financial position, is £100 million (2022: £nil).

The maximum exposure to credit risk in respect of reverse repurchase transactions is £100 million (2022: £ nil) of which credit risk of £100 million (2022: £ nil) is mitigated through the use of collateral arrangements.

Details of collateral received to mitigate the counterparty risk arising from the Group's reinsurance transactions is given in note F10.

Collateral has also been pledged and charges have been granted in respect of certain Group borrowings. The details of these arrangements are set out in note E5.

E5. Borrowings

The Group classifies the majority of its interest-bearing borrowings as financial liabilities carried at amortised cost and these are recognised initially at fair value less any directly attributable transaction costs. The difference between initial cost and the redemption value is amortised through the consolidated income statement over the period of the borrowing using the effective interest method.

Certain borrowings are designated upon initial recognition at fair value through profit or loss and measured at fair value where doing so provides more meaningful information due to the reasons stated in the financial liabilities accounting policy (see note E1). Transaction costs relating to borrowings designated upon initial recognition at fair value through profit or loss are expensed as incurred.

Borrowings are classified as either policyholder or shareholder borrowings. Policyholder borrowings are those borrowings where there is either no or limited shareholder exposure, for example, borrowings attributable to the Group's with-profit operations.

E5.1 Analysis of borrowings


Carrying value

Fair value


2023

£m

2022

£m

2023

£m

2022

£m

£300 million multi-currency revolving credit facility (note a)

90

62

90

62

Property reversions loan (note b)

45

64

45

64

Total policyholder borrowings

135

126

135

126






£428 million Tier 2 subordinated notes (note c)

197

427

202

429

US $500 million Tier 2 notes (note d)

391

413

377

390

€500 million Tier 2 bonds (note e)

430

439

419

416

US $750 million Contingent Convertible Tier 1 notes (note f)

587

618

563

580

£500 million Tier 2 notes (note g)

489

487

476

445

US $500 million Fixed Rate Reset Tier 2 notes (note h)

274

412

262

382

£500 million 5.867% Tier 2 subordinated notes (note i)

536

543

493

465

£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note j)

254

259

239

244

£250 million 4.016% Tier 3 subordinated notes (note k)

253

256

250

231

£350 million Fixed Rate Reset Callable Tier 2 subordinated notes (note l)

346

-

368

-






Total shareholder borrowings

3,757

3,854

3,649

3,582






Total borrowings

3,892

3,980

3,784

3,708






Amount due for settlement after 12 months

3,802

3,918



a    abrdn Private Equity Opportunities Trust plc ('APEOT') has in place a syndicated multi-currency revolving credit facility, of which £90 million (2022: £62 million) had been drawn down as at 31 December 2023. During 2022 the amount of the facility was increased from £200 million to £300 million and its term maturity was extended to December 2025. Interest accrues on this facility at a margin over the reference rate of the currency drawn.

b    The Property Reversions loan from Santander UK plc ('Santander') was recognised in the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the associated property reversions. As part of the arrangement Santander receives an amount calculated by reference to the movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. During 2023, repayments totalling £21 million were made (2022: £15 million). Note G4 contains details of the assets that support this loan.

c    On 23 January 2015, PGH Capital plc ('PGHC') issued £428 million of subordinated notes due 2025 at a coupon of 6.625%. Fees associated with these notes of £3 million were deferred and are being amortised over the life of the notes in the statement of consolidated financial position. Upon exchange £32 million of these notes were held by Group companies. During 2017, the internal holdings were sold to third parties, thereby increasing external borrowings by £32 million. On 20 March 2017, Old PGH (the Group's ultimate parent company up to December 2018) was substituted in place of PGHC as issuer of the £428 million subordinated notes and then on 12 December 2018 the Company was substituted in place of Old PGH as issuer. On 7 December 2023, the Company repurchased £231 million of the principal amount of the notes via a tender offer. The remaining principal amount of the notes at 31 December 2023 is £197 million.

d    On 6 July 2017, Old PGH issued US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%. Fees associated with these notes of £2 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.

e    On 24 September 2018, Old PGH issued €500 million Tier 2 notes due 2029 with a coupon of 4.375%. Fees associated with these notes of £7 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.

f     On 29 January 2020, the Company issued US $750 million fixed rate reset perpetual restricted Tier 1 contingent convertible notes (the 'Contingent Convertible Tier 1 Notes') which are unsecured and subordinated. The Contingent Convertible Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company. The Contingent Convertible Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.625% per annum up to the 'First Reset Date' of 26 April 2025. Thereafter the fixed rate of interest will be reset on the First Reset Date and on each fifth anniversary of this date by reference to the sum of the yield of the Constant Maturity Treasury ('CMT') rate (based on the prevailing five-year US Treasury yield) plus a margin of 4.035%, being the initial credit spread used in pricing the notes. Interest is payable on the Contingent Convertible Tier 1 Notes semi-annually in arrears on 26 April and 26 October. If an interest payment is not made it is cancelled and it shall not accumulate or be payable at any time thereafter.

The terms of the Contingent Convertible Tier 1 Notes contain a contingent settlement provision which is linked to the occurrence of a 'Capital Disqualification Event'. Such an event is deemed to have taken place where, as a result of a change to the Solvency II regulations, the Contingent Convertible Tier 1 Notes are fully excluded from counting as own funds. On the occurrence of such an event and where the Company has chosen not to use its corresponding right to redeem the notes the Company shall no longer be able to exercise its discretion to cancel any interest payments due on such Contingent Convertible Tier 1 Notes on any interest payment date following the occurrence of this event. Accordingly the Contingent Convertible Tier 1 Notes are considered to meet the definition of a financial liability for financial reporting purposes.

The Contingent Convertible Tier 1 Notes may be redeemed at par on the First Reset Date or on any interest payment date thereafter at the option of the Company and also in other limited circumstances. If such redemption occurs prior to the fifth anniversary of the Issue Date such redemption must be funded out of the proceeds of a new issuance of, or exchanged into, Tier 1 Own Funds of the same or a higher quality than the Contingent Convertible Tier 1 Notes. In respect of any redemption or purchase of the Contingent Convertible Tier 1 Notes, such redemption or purchase is subject to the receipt of permission to do so from the PRA. Furthermore, on occurrence of a trigger event, linked to the Solvency II capital position and as documented in the terms of the Contingent Convertible Tier 1 Notes, the Contingent Convertible Tier 1 Notes will automatically be subject to conversion to ordinary shares of the Company at the conversion price of US $1,000 per share, subject to adjustment in accordance with the terms and conditions of the notes and all accrued and unpaid interest will be cancelled. Following such conversion there shall be no reinstatement of any part of the principal amount of, or interest on, the Contingent Convertible Tier 1 Notes at any time.

g    On 28 April 2020, the Company issued £500 million fixed rate Tier 2 Notes (the 'Tier 2 Notes') which are unsecured and subordinated. The Tier 2 Notes have a maturity date of 28 April 2031 and include an issuer par call right for the three-month period prior to maturity. The Tier 2 Notes bear interest on the principal amount at a fixed rate of 5.625% per annum payable annually in arrears on 28 April each year.

h    On 4 June 2020, the Company issued US $500 million fixed rate reset callable Tier 2 notes (the 'Fixed Rate Reset Tier 2 Notes') which are unsecured and subordinated. The Fixed Rate Reset Tier 2 notes have a maturity date of 4 September 2031 with an optional issuer par call right on any day in the three-month period up to and including 4 September 2026. The Fixed Rate Reset Tier 2 Notes bear interest on the principal amount at a fixed rate of 4.75% per annum up to the interest rate reset date of 4 September 2026. If the Fixed Rate Reset Tier 2 Notes are not redeemed before that date, the interest rate resets to the sum of the applicable CMT rate (based on the prevailing five-year US Treasury yield) plus a margin of 4.276%, being the initial credit spread used in pricing the notes. Interest is payable on the Fixed Rate Reset Tier 2 Notes semi-annually in arrears on 4 March and 4 September each year. On 7 December 2023, the Company repurchased US $150 million of the principal amount of the Fixed Rate Reset Tier 2 Notes via a tender offer. The remaining principal amount of the notes at 31 December 2023 is US $350 million.

i     On 22 July 2020, as part of the acquisition of ReAssure Group plc, the Group assumed the £500 million 5.867% Tier 2 subordinated notes. On the same date, the Company was substituted in place of ReAssure Group plc as issuer of the notes. The £500 million 5.867% Tier 2 subordinated notes have a maturity date of 13 June 2029 and were initially recognised at their fair value as at the date of acquisition of £559 million. The fair value adjustment is being amortised over the remaining life of the notes. Interest is payable semi-annually in arrears on 13 June and 13 December.

j     On 22 July 2020, as part of the acquisition of ReAssure Group plc, the Group assumed the £250 million fixed rate reset callable Tier 2 subordinated notes. On the same date, the Company was substituted in place of ReAssure Group plc as issuer of the notes. The £250 million fixed rate reset callable Tier 2 subordinated notes have a maturity date of 13 June 2029 and were initially recognised at their fair value as at the date of acquisition of £275 million. The fair value adjustment is being amortised over the remaining life of the notes. The notes include an issuer par call right exercisable on 13 June 2024. Interest is payable semi-annually in arrears on 13 June and 13 December. These notes initially bear interest at a rate of 5.766% on the principal amount and the rate of interest will reset on 13 June 2024, and on each interest payment date thereafter, to a margin of 5.17% plus the yield of a UK Treasury Bill of similar term.

k    On 22 July 2020, as part of the acquisition of ReAssure Group plc, the Group assumed the £250 million 4.016% Tier 3 subordinated notes. On the same date, the Company was substituted in place of ReAssure Group plc as issuer of the notes. The £250 million 4.016% Tier 3 subordinated notes have a maturity date of 13 June 2026 and were initially recognised at their fair value as at the date of acquisition of £259 million. The fair value adjustment is being amortised over the remaining life of the notes. Interest is payable semi-annually in arrears on 13 June and 13 December.

l     On 6 December 2023, the Company issued £350 million fixed rate reset callable Tier 2 notes which are unsecured and subordinated. The notes have a maturity date of 6 December 2053 with an optional issuer par call right on any day in the six-month period up to and including 6 December 2033. The notes bear interest on the principal amount at a fixed rate of 7.75% per annum up to the interest rate reset date of 6 December 2033. If the notes are not redeemed before that date, the interest rate resets to the sum of the 5 year benchmark Gilt rate plus a margin of 4.65%, being the sum of the initial credit spread used in pricing the notes and a 1% margin step-up. Interest is payable on the notes semi-annually in arrears on 6 June and 6 December each year.

m   The Group has in place a £1.75 billion unsecured revolving credit facility (the 'revolving facility'), maturing in June 2026. The facility accrues interest at a margin over SONIA that is based on credit rating. The facility remains undrawn as at 31 December 2023.

E5.2 Reconciliation of liabilities arising from financing activities

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes (with the exception of lease liabilities, which have been included in note G9). Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's consolidated statement of cash flows as cash flows from financing activities.



Cash movements

Non-cash movements


At 1 January 2023

£m

New borrowings, net of costs

£m

Repayments

£m

Changes in fair value

£m

Movement in foreign exchange

£m

Other movements1

£m

At 31 December 2023

£m

£300 million multi-currency revolving credit facility

62

64

(37)

-

-

1

90

Property Reversions loan

64

-

(21)

2

-

-

45

£428 million Tier 2 subordinated notes

427

-

(231)

-

-

1

197

US $500 million Tier 2 bonds

413

-

-

-

(22)

-

391

€500 million Tier 2 notes

439

-

-

-

(10)

1

430

US $750 million Contingent Convertible Tier 1 notes

618

-

-

-

(32)

1

587

£500 million Tier 2 notes

487

-

-

-

-

2

489

US $500 million Fixed Rate Reset Tier 2 notes

412

-

(119)

-

(20)

1

274

£500 million 5.867% Tier 2 subordinated notes

543

-

-

-

-

(7)

536

£250 million Fixed Rate Reset Callable Tier 2 subordinated notes

259

-

-

-

-

(5)

254

£250 million 4.016% Tier 3 subordinated notes

256

-

-

-

-

(3)

253

£350 million Fixed Rate Reset Callable Tier 2 subordinated notes

-

346

-

-

-

-

346

Derivative assets2

(225)

-

-

108

-

(1)

(118)


3,755

410

(408)

110

(84)

(9)

3,774

1  Principally comprises amortisation under the effective interest method applied to borrowings held at amortised cost. No interest was capitalised in the year.

2  Cross currency swaps to hedge against adverse currency movements in respect of Group's Euro and US Dollar denominated borrowings.



Cash movements

Non-cash movements


At 1 January 2022

New borrowings, net of costs

Repayments

Changes in fair value

Movement in foreign exchange

Other movements1

At 31 December 2022


£m

£m

£m

£m

£m

£m

£m

£300 million multi-currency revolving credit facility

17

61

(17)

-

1

-

62

Property Reversions loan

70

-

(15)

9

-

-

64

£428 million Tier 2 subordinated notes

427

-

-

-

-

-

427

£450 million Tier 3 subordinated notes

450

-

(450)

-

-

-

-

US $500 million Tier 2 bonds

368

-

-

-

45

-

413

€500 million Tier 2 notes

416

-

-

-

22

1

439

US $750 million Contingent Convertible Tier 1 notes

551

-

-

-

66

1

618

£500 million Tier 2 notes

485

-

-

-

-

2

487

US $500 million Fixed Rate Reset Tier 2 notes

368

-

-

-

44

-

412

£500 million 5.867% Tier 2 subordinated notes

550

-

-

-

-

(7)

543

£250 million Fixed Rate Reset Callable Tier 2 subordinated notes

266

-

-

-

-

(7)

259

£250 million 4.016% Tier 3 subordinated notes

257

-

-

-

-

(1)

256

Derivative assets2

(48)

-

-

(177)

-

-

(225)

Derivative liabilities2

5

-

-

(5)

-

-

-


4,182

61

(482)

(173)

178

(11)

3,755

1  Principally comprises amortisation under the effective interest method applied to borrowings held at amortised cost. No interest was capitalised in the year.

2  Cross currency swaps to hedge against adverse currency movements in respect of Group's Euro and US Dollar denominated borrowings.

E6. Risk management - financial and other risks

This note forms one part of the risk management disclosures in the consolidated financial statements. An overview of the Group's approach to risk management is outlined in note I3 and the Group's management of insurance risk is detailed in note F11.

E6.1 Financial risk and the Asset Liability Management ('ALM') framework

The use of financial instruments naturally exposes the Group to the risks associated with them, chiefly market risk, credit risk and financial soundness risk.

Responsibility for agreeing the financial risk profile rests with the Board of each Life Company, as advised by investment managers, internal committees and the actuarial function. In setting the risk profile, the Board of each Life Company will receive advice from the Chief Investment Officer, the relevant With-profit Actuary and the relevant actuarial function holder/Chief Actuary as to the potential implications of that risk profile with regard to the probability of both realistic insolvency and of failing to meet the regulatory Minimum Capital Requirement. The Chief Actuary will also advise the extent to which the investment risk taken is consistent with the Group's commitment to help customers secure a life of possibilities, including meeting the FCA's expectations under the New Consumer Duty.

Derivatives are used in many of the Group's funds, within policy guidelines agreed by the Board of each Life Company and overseen by investment committees of the Boards of each Life Company supported by management oversight committe